What is ‘supercore’ inflation? Economists are obsessing over a narrow slice of price data

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The U.S. Department of Labor will report the inflation rate for December on Thursday, and observers expect inflation to cool further after price increases hit their highest point in decades last year.

But some economists and analysts are starting to look past the general consumer price index (CPI), which measures price changes in a basket of goods and services households commonly buy. The basket is supposed to be comprehensive, including goods and services across the economy, but is weighted toward shelter, food, energy, transportation, medical services and education. Instead, economists are studying a narrower slice of price data to get a more accurate picture of what’s happening in the economy.

Observers already track a metric called “core inflation,” which excludes more volatile food and energy prices. Headline and core inflation can drift apart, especially when gas prices spike. In June, the U.S. reported a 9.1% year-on-year inflation rate, fueled by an almost 60% increase in gas prices over the same period. Yet core inflation, which excluded energy prices, rose by a milder 5.9% year on year.

But some economists want to drill further into the price data in pursuit of a measure called “supercore inflation.” Unlike core inflation, “supercore” inflation does not have an established definition, but the term refers to price measures that exclude sectors that economists feel distort the broader inflation figure. Proponents argue that supercore inflation provides a more accurate picture of what’s pressuring prices beyond short-term supply shocks.

What is supercore inflation?

Economist and New York Times columnist Paul Krugman characterizes supercore inflation as a figure that excludes food, energy, and housing. (Rents jumped during the pandemic in part as people started to work remotely.) Krugman went even further in a recent column, coining “superdupercore” inflation, which also excludes used-car prices, which surged during the height of COVID-19 as well.

Excluding such volatile sectors keeps extraordinary events, like supply-chain disruptions from the pandemic and the war in Ukraine, from skewing price data, making it easier to identify what’s causing price hikes longer term.

Rather than trimming down the basket of goods used to measure inflation, some economists argue that price increase measurements should only take into account wages, since labor costs dictate what companies charge for goods and services. Former Treasury Secretary Larry Summers gave his own definition of “supercore inflation” last year. “We should be thinking in terms of wage or labor-cost inflation as a kind of ‘supercore’ measure of inflation,” Summers told Bloomberg in April.

Economists like Summers warn that a tight labor market forces companies to pay higher wages to retain employees. Companies then pass the higher labor costs on to consumers, fueling inflation and further wage hikes in a phenomenon known as a “wage-price spiral.”

U.S. Federal Reserve Chair Jerome Powell seems to be worried about wages. He says he’s continuing to pay attention to an increase in labor costs even as broader inflation cools.

“We want wages to go up strongly, but they’ve got to go up at a level that is consistent with 2% inflation over time,” Powell said at an event at the Brookings Institution on Nov. 30.

Some economic analysts are now studying inflation in the services sector rather than in the economy as a whole, according to the Wall Street Journal. Prices in the services sector reflect wage costs more so than prices in the goods sector. Therefore, high services inflation could signal that a tight labor market and high wages are continuing to put upward pressure on prices.

“The market will transition toward a greater focus on the labor-market numbers,” Roger Hallam, global head of rates for Vanguard, told the Wall Street Journal.

What is the inflation rate?

In November, headline inflation increased by 0.1% month on month, while core inflation was slightly higher, increasing 0.2% month on month. Headline and core inflation increased by 7.1% and 6.0% respectively on a year-by-year basis.

Wage growth remained strong in November, rising 5.1% on a year-on-year basis.

A Dow Jones consensus of economists predicts that headline inflation will decrease by 0.1% in December from the month before. Yet core inflation is still expected to increase by 0.3%. On a year-on-year basis, headline and core inflation are expected to increase 6.5% and 5.7% respectively.

Thursday’s price report will be the last before the Fed’s Feb. 1 decision on whether to raise rates.

This story was originally featured on Fortune.com

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