Analyzing Supercore Inflation: Why It May Not Be the Ideal Target for Policy-Makers

Supercore Inflation Is Worth Watching, But It Is Probably Not A Good Policy Target

The Federal Reserve has recently faced several tricky policy decisions, despite the fall in headline inflation and historically low unemployment rates. One of the most significant challenges has been the unusual volatility of relative prices during the 2021-2022 inflation, particularly the subset of prices called the superstore, which some observers believe the Fed has been targeting. However, there is evidence that this focus may have led to a more-than-prudent degree of monetary policy tightening that contributed to some negative economic outcomes in early 2023.

What Is the Supercore?

The superstore is a subset of prices that go beyond the regular core prices used in measures like the core consumer price index or the personal consumption expenditures index. While the core versions of these indices remove highly volatile prices from the food and energy sectors, the superstore removes even more items. Federal Reserve Chairman Jerome Powell referred to these prices as core nonhousing services in a February 2022 press conference.

However, focusing on the superstore may not be the best approach for monetary policy, as it does not account for the stickiness of prices. Some prices, such as those for oil or wheat quoted on commodity exchanges, respond to market changes immediately. In contrast, prices such as city bus fares or college tuition change only once a year. Economists offer several reasons for price stickiness, including the costs of implementing price changes, strategic considerations, and marketing implications.

The Risks of Targeting Supercore Inflation

The Federal Reserve’s focus on superior inflation can potentially cause unintended harm to the economy. Monetary policy tightening based on this measure led to high-interest rates by early 2023, contributing to the banking crisis that began after the failure of Silicon Valley Bank (SIVB) in March of that year. While it is essential to address inflation concerns, targeting the super core may not be the best policy choice.

Related Facts

• The Federal Reserve has set a 2% inflation target for the past decade. It has recently been using a policy strategy called average inflation targeting (AIT) to keep inflation at that level over time.
• Core inflation is around 3.6%, while super core inflation is about 4.8%.
• The Federal Reserve is also facing challenges with rising asset prices, particularly in the housing market.

Key Takeaway

While super core inflation is worth watching, it may not be the best policy target for the Federal Reserve. Focusing on this measure alone can lead to unintended consequences that may harm the economy, especially if interest rates rise too high and lead to a financial crisis. Instead, policymakers should balance inflation concerns with a broader perspective on the economy and the sector-specific factors that drive price increases.

Conclusion

The Federal Reserve’s monetary policy decisions are crucial for the economy’s health and stability, and the unusual volatility of relative prices in recent years has made these decisions more challenging. While the superstore is essential, policymakers should not rely on it alone to guide their approach to inflation. By taking a more comprehensive view of the economy and considering the impact of monetary policy on every sector, the Federal Reserve can make more informed decisions that lead to sustainable long-term growth.