Inflation Drops to 6%, But Housing Costs Remain High—and the Fed Is Still Watching ‘Supercore' Inflation

Al Drago | Bloomberg | Getty

Jerome Powell, chairman of the US Federal Reserve, during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, US, on Tuesday, March 7, 2023.

The latest inflation numbers are in line with expectations, dropping to 6% year-over-year, with "supercore" inflation increasing slightly, according to Labor Bureau data.

Supercore inflation is a new buzzword used by economists to describe the price of services for things like visiting the dentist or getting a haircut, but it excludes housing, food and energy costs. The concept has been a concern for a while: Federal Reserve chair Jerome Powell singled out supercore price growth as the "most important category" for understanding the "future evolution" of inflation in a speech last November.

In February, "supercore" services inflation rose 0.2% for the month and was 4% higher than a year ago.

Inflation is down overall compared with last year, but the underlying month-over-month price of all goods and services increased 0.4% in February, following an average monthly gain of 0.6% in the previous six months, as measured by the consumer prices index (CPI).

The increase was driven mostly by shelter costs, which were up 0.8%, compared with 0.7% last month. This was largely expected, as consumers are still reeling from housing costs that have surged in the last two years.

Supercore inflation remains elevated

Even with year-over-year inflation moving closer to the Fed's target benchmark rate of 2%, the cost of services has become a growing share of overall inflation in recent months, and the central bank is closely monitoring so-called supercore inflation.

Here's a look at how much costs for selected services have risen in the last year, as of February:

  • Package delivery: 14.4%
  • Pet-related services: 10.5%
  • Hotels and motels: 7.4%
  • Trash collection: 6.9%
  • Laundry: 6.8%
  • Dental services: 6.6%
  • Haircuts: 4.8%

Housing costs are excluded from supercore inflation because of the lag in how shelter prices are measured by the CPI. Plus, the Fed expects shelter prices to cool off long-term, which would make them less of a factor when it comes to rising inflation. Likewise, volatile food and energy prices are excluded.

"In the housing services sector we expect inflation to continue moving up for a while but then to come down, assuming that new leases continue to be lower," Fed chair Jerome Powell said in an early February statement.

Since the cost of services are driven largely by wages, rising service costs could keep inflation elevated above 2% for many months to come, in what's known as "sticky" inflation.

However, supercore inflation persists, as the measure rose slightly last month.

"Powell would say that he wants to see clear and convincing evidence that inflation, in all of its manifestations, broadly has come down," says Mark Hamrick, Bankrate's senior economic analyst. "If he and his colleagues see signs that what would traditionally be seen as 'stickier' inflation is relenting, they'd draw encouragement from that."

While the decline in inflation is encouraging news, it's not likely to discourage an interest rate hike at the next Federal Open Market Committee meeting March 21 and 22.

Goldman Sachs economists suggested Monday that the recent failure of Silicon Valley Bank and Signature Bank could outweigh concerns about inflation, prompting the Fed to pause raising rates to limit the economic fallout. So far, that seems unlikely.

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