Supercore Inflation Excludes Food, Energy And Housing

Key takeaways

• Supercore inflation purposefully ignores highly volatile areas of the economy, like housing, food and energy, to give a clearer picture of inflation
• Food inflation increased 10.4% year-over-year in December, while energy inflation eased to 7.3%
• Shelter inflation is up 7.5% year-over-year

We all see the headline inflation number, but it doesn’t tell the whole story. This is because the CPI report includes many items that can have volatile price swings that distort the overall inflation number. This is why core inflation is also reported. However, some economists believe this isn’t good enough and we should focus on supercore inflation.

Here is what supercore inflation is and how some of the areas it excludes have been impacting overall inflation. Plus, here’s how Q.ai can help in inflationary times.

What is Supercore inflation?

Supercore inflation is an economic measurement that strips away volatile items from the traditional Consumer Price Index (CPI), such as food, energy and housing. It is an alternative method for tracking inflation and gives a more accurate snapshot of underlying price pressure. As of this writing, there is no agreed-upon definition of supercore inflation, but when people talk about it they typically mean inflation numbers, less food, energy and housing.

Most people are familiar with the traditional CPI report that measures overall inflation. But food and energy, in particular, can have very volatile price swings. Because of this, core inflation is also tracked, which is the inflation report with food and energy removed from the data.

While these two methods have been standard for many years, some economists argue that supercore inflation is the most accurate measure that central banks should be looking at to determine their monetary policy.

The reason for this is that the items making up the CPI are weighted, and food, energy and housing have large impacts on the final number. For example, when inflation spiked in June, the majority of the increase was due to the rapid rise in gas prices. When gas was removed from the final tally, core inflation dropped from 9.1% to 5.9%.

However, to fully understand supercore inflation, it is important to get more information about the Consumer Price Index in general

How the Consumer Price Index measures inflation

The Consumer Price Index is an index that tracks prices for thousands of items consumers may use in their daily lives. These items, also known as a basket of goods and services, are monitored to determine how much prices have increased month-over-month and year-over-year. The change in price is known as inflation when prices go up, and deflation, when prices go down.

The CPI is generated by the U.S. Bureau of Labor Statistics (BLS) and provides an overall percentage and a breakdown of increases or decreases for the categories it tracks. For December 2022, the CPI showed that prices rose an unadjusted 6.5% from December 2021. This is a drop from November’s 7.1% increase, which means the overall cost of a basket of goods and services is declining, even though it’s not technically deflation. Deflation only occurs when prices drop below zero, not simply when inflation slows.

The main driver of the monthly decline in inflation was lower gas prices, as the energy index fell 4.5%. Most other items, including food, increased for the month.

The critical thing to remember about the CPI is to look at both the headline, or overall, number and the underlying data. This is because they can tell different stories. This became evident in July 2022. In that report, prices were unchanged month-to-month for the overall CPI. However, most underlying categories were higher. Gasoline prices decreased at such a significant rate that it pulled down the overall number due to its weighting in the report.

Why the CPI excludes food and energy

Food and energy are volatile in terms of their sensitivity to price spikes from adverse events. This is because food and energy trade on open markets where traders use adverse events to justify moving prices up or down. However, it’s not always traders influencing these prices.

Using energy as an example, one event, such as a brief refinery shutdown in one region of the U.S., can affect gas prices in that area but leave other regions unaffected. This can result in a hyperlocal inflationary event that lasts for a short period and eases when the refinery comes back online. If the CPI were to include this spike in its calculations, the final number wouldn’t be reflective of the overall economic picture for the entirety of the U.S.

This situation is true for food, although an issue with food production in one part of the country can have far-reaching effects. One recent example is a staple on U.S. tables, iceberg lettuce. A soil-borne disease and a virus transmitted by insects decimated crops in California’s Salinas Valley, a major supplier of iceberg lettuce to the country. This caused prices to spike and quality to decline.

Another shortage consumers are experiencing is with eggs. A recent avian flu outbreak, among other issues, has led to a shortage of eggs. With supply low and demand high, egg prices have skyrocketed. The CPI shows egg inflation up 11.1% in December compared to the month before and nearly 60% higher year-over-year.

As a result of this volatility, the Bureau of Labor Statistics also releases the CPI report less these industries. For December, the all items index less food and energy rose 0.3% compared to November. The rising cost of shelter was the driving factor behind this increase.

Let’s look at food, energy and housing inflation to see how it has been impacting overall inflation.

Food inflation trend

Year-over-year inflation for food overall in December 2022 was 10.4%. Broken down, the change in price month-over-month was 0.3% for food at home and 0.4% for food purchased away from home. The unadjusted increase in food prices from December 2021 to December 2022 was 11.8% for home consumption and 8.3% for away-from-home consumption.

The overall trend for food inflation from November to December was lower. The report showed decreases in categories like fruit, but these were offset by significant increases in other food groups, like eggs. Other food items still facing large increases in cost include dried beans, butter and condiments. It will be important to keep an eye on fertilizer, as a continued shortage could lead to higher food costs in the future.

Energy inflation trend

The overall rate of year-over-year inflation for energy in December 2022 was 7.3%. Energy commodities were down 9.4% from November, all types of gasoline were also down 9.4%, and fuel oil was down 16.6% during this same period. However, fuel oil was still up 41.5% year-over-year.

Oil prices are lower than they were in early 2022, and with a mild winter so far in much of the U.S., demand for heating oil has not been high, helping to keep prices stable. However, as the conflict between Russia and Ukraine continues, OPEC continues to cap production, and as we enter the warmer months in the U.S., oil prices could approach $100 a barrel or more. Some analysts have predicted oil could reach $140 per barrel in 2023.

Housing inflation trend

Housing, or shelter as it’s categorized on the CPI, tracks the cost to rent or an owner’s equivalent cost of renting. For December 2022, the shelter index rose 0.8% from the month before, with rent costs also increasing by 0.8%. The cost of renting temporary lodgings (hotels, for example) increased by 1.7%. Shelter prices were the dominant factor in the monthly increase in the all items index less food and energy.

In 2023, housing inflation could trend higher for a handful of reasons. First, homebuilders have been scaling back on new construction. There is already a short supply of homes, so not adding additional homes onto the market will help to push home prices higher. Second, the prices of many building materials have stabilized, but the lead times for many items are increasing. Any additional disruptions in the supply chain could move building material prices higher.

Then there are the wild cards in housing. Interest rates are high compared to recent memory, which has slowed the hot housing market slightly. However, while the number of homes sold is decreasing, the prices are not. In Pennsylvania, for example, the number of homes sold in December 2022 was down 29.5% compared to a year ago, but home prices were up 2% over the same period.

As with energy, housing needs to be closely watched. If the Federal Reserve continues to raise interest rates, there could be a continued slowdown in housing demand. However, if the economy avoids recession and the Fed begins to lower interest rates in the second half of the year, homebuilders might start building again, helping to increase supply to meet demand.

The bottom line

While removing food, energy and housing from the inflation report can help economists get a better sense of what is happening in an economy, it is still important to measure the rise in prices in these areas as well.

The reason is that these three areas have a significant impact on the daily lives of consumers, given that they need to purchase food to survive and buy gas to commute. So while more data is sometimes better, this is not always the case. Of course with supercore inflation not having a set definition, it could be some time before this report becomes more mainstream.

Overall, the short-term inflation trend for housing, food and energy is slowing but is still higher than a year ago. The CPI report showing small declines as opposed to large drops could signal that the U.S. economy is headed for a soft landing as the Fed intended. A bull market could ensue later this year if this is the case. In this case, the Fed would have a new problem on its hands, trying to keep inflation from rising again while keeping interest rates stable.

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