Super(core) Cool

In State of Flux we noted, “The current market setup creates an interesting proposition for U.S. Treasury investors in that should U.S. economic data, particularly the inflation data, soften over the coming quarters we would expect to see a rally in U.S. Treasuries.” On June 12th, we received some of that in form of a soft consumer price index (CPI) data print which fueled financial markets. Since the CPI release, benchmark U.S. 10-year Treasury yield have declined 13 basis points (bps) and S&P 500 futures have risen 1.7%. The underlying CPI data was encouraging. In particular, the supercore basket, which measures service inflation excluding food, energy, and housing costs, reported the first negative monthly print since September 2021, as our chart shows.

According to Fed Chair Jerome Powell, supercore “may be the most important category for understanding the future evolution of core inflation.”[1] Core inflation excludes food and energy costs. The supercore category includes some of the most persistent components of services inflation from healthcare and education to household necessities like auto and housing insurance. The basket represents 25 percent weight in the overall CPI index.

In The Good Stuff, we covered “supercore” inflation in detail. As we discussed in that piece, a major contributor to supercore CPI year-over-year inflation has been auto insurance, a small line item in the CPI measure with less than 3 percent weight. Since auto insurance surged more than 20% over the most recent 12-month period, auto insurance alone contributed to nearly half of the “supercore” CPI inflation rate. Similar to supercore inflation, auto insurance inflation flipped into negative territory last month, falling 0.1% in May. It was the first monthly drop in auto insurance costs since December 2021. That was consistent with our earlier speculation that “auto insurance price increases may be slowing or plateauing.” Given auto insurance costs surged a total 47% from December 2021 to April 2024, we continue to see the potential for auto insurance inflation to be beyond its peak rate of change with room for it to become a drag on inflation instead of a major contributor in the months ahead.

According to the Fed, wages are tightly linked to service costs. Lately we have seen consistent deceleration in wage growth in the US. Average hourly earnings in the nonfarm payrolls report grew 4.1% in May 2024, slower than 5.9% in March 2022. Employment cost index (ECI) year-over-year change moderated to 4.2% in the first quarter of 2024 vs the peak level 5.1% in the second quarter of 2022. As long as wage growth continues to cool down, so should the supercore inflation.

[1] “Inflation and the Labor Market,” Fed Chair Jerome H. Powell at the Hutchins Center on Fiscal and Monetary Policy, Brookings Institution, Washington, D.C., Nov. 30, 2022