United States: Supercore and measurement debates shape Fed path – BNY

BNY strategists John Velis and David Tam see elevated US supercore inflation as a key argument for further tightening but still favor a July hold. They note that core services ex shelter has run above its pre-COVID pace and discuss Chair Kevin Warsh’s Inflation Frameworks Task Force, which will reassess measures like trimmed mean inflation and their policy implications.

Supercore pressures and task force review

"The most compelling argument for a rate hike remains the inflation rate. We don’t view Chair Kevin Warsh’s frequent (of late) references to price stability to axiomatically indicate a new hawkish direction from the Fed, but we do acknowledge that other speakers have gone on record that they view inflation as not only too high but also reflecting upward pressures beyond mere tariff effects and the supply shock from the Middle East. We share that concern, and note that since mid-2023, so-called “supercore” (i.e., core services inflation ex shelter) has been running at nearly a percentage point above its pre-COVID pace."

"So why, then, not raise rates this week? First, we don’t find the arguments for a hike completely persuasive, although we acknowledge (again) that the meeting is a close call and supercore inflation has caught our eye for a while. While we don’t dismiss sticky supercore inflation, it’s steady and hasn’t been rising."

"Furthermore, much of the increase in this important inflation subcategory is from transportation services – notably airfares, which are obviously affected by the energy shock. Other components keeping the pressure on services are health care costs – representing rising insurance premiums, themselves impacted by reduced Obamacare subsidies – and financial services. Transportation and health care together contribute 0.7% to the 3.0% increase in supercore. None of these are particularly sensitive to tighter monetary policy."

"Warsh has said that the Inflation Frameworks Task Force will examine “the drivers of inflation, first principles, and weigh the full range of ideas for delivering price stability in a changing economy.” The use of “first principles” is noteworthy because, though the Fed formally targets headline PCE, Warsh has at times signaled that he favors other measures, such as a form of trimmed mean inflation."

"Crucially, while trimmed mean inflation understated rising inflation in the aftermath of COVID relative to core y/y PCE, it need not always be dovish. In a period of disinflation driven by specific volatile components, trimmed mean would also understate disinflation. In the wake of the global financial crisis, with headline inflation falling quickly in late 2008, while the Dallas trimmed mean took until mid-2009 to show a similar decline."