Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why the Fed Watches Supercore Inflation So Closely
Transcript
- Lucas: So the July CPI report is out, and the headline number was pretty benign — up 0.1 percent on the month, 3.4 percent on the year. But the number the Fed actually cares about is hiding inside that report, and it's called supercore inflation. Luna: Supercore. That sounds like something from a comic book. What exactly is it? Lucas: It's the Fed's nickname for core services inflation excluding housing. So you take the CPI, strip out food and energy, then strip out shelter — rent and owners' equivalent rent — and what's left is the stuff like medical care, transportation services, recreation, even things like haircuts and gym memberships. Luna: So it's basically the price of services that aren't housing. Why does the Fed zoom in on that? Lucas: Because housing is noisy and lags reality. Rent inflation has been cooling for months, but it moves slowly. Supercore strips that out and gives you a read on the services economy that responds more quickly to wage pressures and demand. Luna: And services are the sticky part of inflation, right? Goods prices fall, but services keep climbing. Lucas: Exactly. That's why the Fed watches it. If supercore stays hot, it tells them that underlying price pressures haven't been tamed even if the headline number looks okay. Luna: So what did the July report show on supercore? Was there any relief? Lucas: Actually, supercore came in a touch softer than expected. But the annual rate is still above the Fed's comfort zone. It's been hovering around three and a half to four percent for months, while the overall CPI annual rate has dropped to 3.4. That gap is the problem. Luna: So the Fed's favorite gauge is running hotter than the headline. That must be making the policy folks nervous. Lucas: It's one of the reasons they've held rates steady. The effective fed funds rate has been pinned at 3.63 percent since July. They want to see supercore make real progress before they even think about cutting. Luna: But the bond market seems to be betting on lower inflation anyway. The ten-year breakeven just dropped to 2.27 percent. That's below the Fed's target. Lucas: Right, and that's the tension. The bond market looks at the weak jobs report, cooling GDP, and falling commodity prices, and says inflation is going to keep sliding. But the Fed looks at supercore and says not so fast. Luna: Who's right? Is the bond market being too optimistic, or is the Fed being too cautious? Lucas: That's the million-dollar question. The bond market has a decent track record, but it's been wrong before. And supercore is sticky for a reason — services prices are driven by labor costs, and wages are still growing at around four percent. Luna: So you're saying the Fed is worried that if they cut rates too soon, services inflation will reignite? Lucas: Exactly. And honestly, if you've had a gym membership lately, you know services inflation is real. That's actually been one of the stickiest items — it's been beating core CPI for over a year. Luna: I've noticed. My gym raised their fee again. I thought that was just my gym being greedy. Lucas: It's part of a broader trend. Recreation services, medical care, even haircuts — they all have a large labor component, and that keeps them sticky. Luna: So what would it take for supercore to actually cool down? Wages would have to slow, right? Lucas: That's the key. The Fed needs to see wage growth moderate to something like three percent or lower. That would take the pressure off services prices. But that's easier said than done. Luna: Makes me wonder if we're in for a long period of rates staying where they are. Lucas: The market is pricing in one cut by the end of the year, but the Fed keeps pushing back against that. They're being very deliberate. Luna: And I guess that's the thing — for people listening, this supercore stuff might sound like inside baseball, but it directly affects mortgage rates, car loans, credit card interest. This is where the rubber meets the road. Lucas: Absolutely. And that's why we do this show — to make that connection clear. If walking through the economy with us has made something click for you, and you want to keep it ad-free, you can help us out at buy me a coffee dot com slash fexingo. Luna: Yeah, even a coffee's worth of support helps us keep the lights on here. Lucas: Alright, back to supercore. One thing I want to emphasize is that the Fed's focus on this metric isn't just academic. It's the reason they've been so hesitant to declare victory on inflation. Luna: So when the next CPI report comes out, we should be watching supercore more than the headline? Lucas: Yeah, that's the takeaway. The headline gets the headlines, but the supercore number is what will move the Fed's decision-making. It's the quiet signal in the noise. Luna: And it's been stubbornly high. Do you see any scenario where it starts falling sharply? Lucas: It would take a significant cooling in the labor market. If unemployment rises and wage growth slows to three percent, you'd see supercore start to fade. But that's a painful path. Luna: So the Fed is kind of stuck between letting inflation run a bit hot and risking a recession. Lucas: That's the classic dilemma. And it's why the next few months of data are going to be so important. The July jobs number was weak, but one month isn't a trend. Luna: Right. So we should look at the next few months of supercore data to get a clearer picture. Lucas: Exactly. If supercore keeps grinding lower, the Fed might get the confidence to cut. If it stalls, they'll hold until they see meaningful progress. Luna: It feels like we're in a waiting game. Lucas: It is. And that's the nature of data-dependent policy. They're not going to telegraph a move too far in advance, because the data can change. Luna: So for the average person, what should they do with this information? Is there any practical takeaway? Lucas: If you're planning to buy a house or refinance, waiting might pay off — but it's not guaranteed. If you're carrying credit card debt, expect rates to stay high for a while. And if you're negotiating a raise, remember that services inflation gives employers an excuse to keep wages sticky. Luna: That's a good point. The Fed's obsession with supercore has real consequences for our wallets. Lucas: It does. And that's why we'll keep watching it with you.