The Federal Reserve (Fed) has long used Core Inflation which is an important measure of inflation in the economy. Core Inflation is derived by subtracting volatile components such as food and energy prices from the consumer price index (CPI). In other words, it measures the underlying trend of inflation, excluding these more reactive, commodity-price-driven elements. When Inflation rises above its targeted rate, it usually leads to higher interest rates. Central banks set interest rates to control borrowing. The stated goal is to see that credit balances and inflation do not spiral out of control, thereby weakening the economy.
The Fed under the Biden administration developed a new measure: Supercore Inflation. In addition to the food and fuel parts of the economy, the Jerome Powell Federal Reserve is now stripping out the cost of labor inflation and housing. On the one hand, extreme labor and housing inflation is real and stems from government actions during the pandemic. On the other hand, changing the manner of calculation creates another layer of complexity. The more opaque the policies, the less people can make informed decisions.
Why is the Fed Creating New Definitions?
Of course, there is always a political consequence to interest rate changes. Interest rate rises affect consumer spending and investment decisions, which can lead to economic slowdowns or even recessions. But, if Supercore Inflation falls below its targeted rate for too long, central banks may lower interest rates to stimulate the economy. In either case, these shifts in Supercore Inflation have an important influence on consumers. And, voters frequently “vote their pocketbooks.
Obviously, businesses should be aware of how changes in inflation can affect their bottom line. Higher inflation generally puts pressure on profits while lower inflation can lead to increased demand for goods, services and staff. Its important to keep up with these changes in Fed methodology. Supercore Inflation usage impacts overall economic conditions.
Will this New Metric Help or Hurt Consumers?
No one who shops for groceries or commutes to work believes the government’s inflation figures. They may claim the rate is 4.5%, but the people tell me their eggs, gasoline, haircuts, rent, etc., are all up much more than that. Exclusion of food, energy, housing, and services has the effect of allowing the Fed to keep interest rates lower – at least for the short term.
The Federal Reserve is set to slow down its rate hikes yet again, as policymakers debate just how much further to go. The U.S. central bank has been gradually raising interest rates over the past few years in order to smooth interest rate volatility an economic downturn. But with the pace of economic growth slowing, the Fed is now having second thoughts about whether it has gone too far with its rate hikes.
One school of thought believes that the economy can handle a certain degree of higher rates without getting derailed altogether and that further increases should be made slowly and carefully. Another camp argues that further hikes are unnecessary and that they could even cause greater financial instability if not done right. Regardless, even left-leaning economists (Keynsians) are predicting recession as a result of current Fed course. And, investors definitely don’t believe in the Fed’s plan.
The Bottom Line
In summary, Fed decision-making process considers many factors, including other country’s central bank monetary policy. They consider potential risks from geopolitical factors such as trade wars or oil price shocks that could affect global markets. We’re not always in control of those things. It’s complicated enough without adding definitions and new metrics to achieve a political end.
Good legislative leadership could do more to improve the American economy in a real way, with clarity. We need a measure to which Americans can relate as a reliable – and understandable – measure. More importantly, we need sane economic policy. Wanton government spending is the biggest contributor to inflation. The more government spends, the less valuable its currency becomes. Energy independence, a long-term plan to return American manufacturing to American soil (and the soil of its allies) and REDUCED SPENDING are the best ways to stabilize economic life. Period.