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Supercore Inflation is Worth Watching, but it is Probably Not a Good Policy Target

Although headline inflation continues to fall and unemployment is near a 50-year low, the Federal Reserve still faces some tricky policy decisions over…



Although headline inflation continues to fall and unemployment is near a 50-year low, the Federal Reserve still faces some tricky policy decisions over the next few months. Many of these have to do with the unusual volatility of relative prices during the 2021-2022 inflation, a topic that I wrote about in a recent commentary. This piece picks up where that one left off. It focuses on the behavior of the subset of prices that constitute the so-called supercorerelative to prices that are more flexible.

Supercore prices have been in the news lately because some observers think the Fed is targeting them. This commentary will argue a focus on supercore inflation may have led to a more-than-prudent degree of monetary policy tightening by late 2022 and early  2023. The fact that high interest rates appear to have been a contributing factor to the banking crisis that was touched off by the failure of Silicon Valley Bank in March only strengthens the case.

So, what is the supercore?

So, what, exactly, is the supercore? The notion of ordinary core prices is familiar enough. The core consumer price index, for example, is the ordinary CPI with the highly volatile prices of food and energy removed. The personal consumption expenditures index, a CPI alternative, also has a core version that removes the same two sectors. Measures of the supercore go further by removing still more items.

The impression that the Fed is targeting supercore inflation was reinforced by a press conference held on February 1 by Chairman Jerome Powell. In answering a reporter’s question, Powell divided prices into three sectors. “In the goods sector,” he said, “you see inflation now coming down because supply chains have been fixed … In the housing services sector, we expect inflation to continue moving up for a while but then to come down … So, in those two sectors, you’ve got a good story. The issue is that we have a large sector called nonhousing service — core nonhousing services, where we don’t see disinflation yet.” Although he does not use the term, what Powell calls core nonhousing services is what others call the supercore.

It is almost as if Powell is treating the problem of inflation the way a frontline surgeon might treat a wounded soldier. “We’ve stopped the bleeding in his leg; we’ve got the bullet out of his shoulder; now all we’ve got to do is get that pesky piece of shrapnel out of his neck.” But is continuing to tighten monetary policy until supercore prices, too, stop rising really a good idea? Read on.

Why supercore prices are sticky

Economics 101 teaches us that market prices rise or fall in response to changes in supply and demand. True enough, but some prices respond faster than others. At the flexible end of the spectrum, the prices of oil or wheat quoted on commodity exchanges change by the minute. At the sticky end of the spectrum, prices like city bus fares or college tuitions are likely to change just once a year, if that often.

Economists suggest a variety of reasons for price stickiness. Some point to the costs of announcing and implementing price changes, such as a restaurant’s cost of printing new menus or a laundromat’s cost of adjusting the coin mechanisms on its washers and dryers. Others emphasize strategic considerations, such as the fear that the first seller to raise prices might lose market share to competitors who are slower to change. Marketing considerations like the fear of annoying loyal customers may be another factor. And prices that are subject to long-term contracts often can change only when those contracts expire.

The Atlanta Fed publishes monthly indexes for a flexible CPI and a sticky CPI. Using an admittedly arbitrary cutoff, it classifies flexible prices as those that change, on average, at least once every 4.3 months and sticky prices as those that change less frequently. That division makes about half the prices in the CPI flexible and half sticky. If weighted by value, the split is about 30 percent flexible and 70 percent sticky.

The bulk of the sticky CPI consists of services. The Atlanta Fed derives a “core sticky CPI” by removing its only food or energy element, “food away from home.” It then derives a measure called “core sticky CPI ex shelter” by further removing the category “owner equivalent rent.” That index, more than 90 percent of which is made up of services, covers 45 percent of the full CPI.

In what follows, I will use the Atlanta Fed’s core sticky CPI ex shelter as a measure of the supercore. It is probably not the exact measure of “core nonhousing services” to which Powell referred at his press conference, but if not, it is very close.

Figure 1 shows year-on-year data for the rate of change of the Atlanta Fed’s sticky and flexible price indexes since 1967. Not surprisingly, the flexible index is the most volatile. At major turning points, changes in the sticky price inflation lags visibly behind changes in flexible price inflation by an amount ranging from half a year to well over a year.

The relative supercore index

Let’s turn now from the inflation rate of supercore prices to the value of the supercore relative to the flexible CPI. Figure 1 showed the long-term trend of inflation rates, but nothing about the relative level of sticky and flexible prices. Figure 2 provides the missing information. For easy comparison, the top line, measured on the left-hand vertical axis, repeats the rate of flexible price inflation as shown in Figure 1. The lower line, measured on the right-hand vertical axis, shows the ratio of the level (not the inflation rate) of supercore CPI to the level of the flexible CPI, with January 1967 equal to 100. I will refer to this ratio as the relative supercore index. A value above the trendline shows that the nonhousing services in the supercore index are more expensive than usual relative to the goods in the flexible index. Similarly, a value below the trendline shows that increases in the prices of the items in the supercore have fallen behind those of more flexible goods.

Two features stand out in Figure 2.

First, as the trendline indicates, the ratio of supercore to flexible prices has increased by about 20 percent over time when cyclical ups and downs are smoothed out. My best guess is that this trend is largely due to the “Baumol effect.” As William Baumol and W. G. Bowen noted in a 1965 paper, there is a tendency for labor productivity to increase more rapidly in goods markets than in service markets. (It takes far fewer farm workers to harvest a ton of wheat than it did in the 19th century, but the same number of musicians to perform a Beethoven string quartet.) Because of slower productivity growth, the prices of services tend to rise faster than the prices of goods. Since more than 90 percent of the flexible CPI consists of goods while more than 90 percent of the supercore consists of services, the Baumol effect provides a plausible explanation of the upward trend of the relative supercore index.

Second, even a casual look at Figure 2 suggests that the relative supercore index tends to drop below its trend during periods when flexible prices are especially volatile. The stagflationary 1970s are one example. The supercore dropped below trend again in the years around the global financial crisis of 2007-2008, when the flexible-price inflation rate was highly variable, even though not as high as in the 1970s. In contrast, during the period of relative stability from the mid-1980s to the early 2000s – the Great Moderation – the supercore recovered relative to the flexible CPI.[1]

Implications for policy

Back now to our main theme – does targeting supercore inflation make sense? I can think of three reasons why it might not. 

Lags matter. The first reason is that monetary policy operates only with a considerable lag. Raphael Bostic, president of the Atlanta Fed, wrote recently that “a large body of research tells us it can take 18 months to two years or more for tighter monetary policy to materially affect inflation.” A recent paper by Taeyoung Doh and Andrew T. Foerster of the Kansas City Fed suggest that because of changes in the way the Fed implements tightening, those lags may be shorter now than they used to be. Even so, the new estimates show a lag of a full year for the effect on inflation and as much as three years for the effect on unemployment, with a wide range of uncertainty.

The Fed did not start its program of rate increases until March 2022. Taken at face value, that would mean we won’t feel the full effects of recent tightening until the fall of 2023 – or later this spring, at the earliest, if the new estimates hold up. Of course, the lag is less for some prices than others. Since supercore prices, by definition, are among the stickiest, it would seem that they would be subject to a lag toward the long end of the estimated range.

Lags matter for policy. If you want to nip an inflationary outbreak in the bud, the time to act is not when you see the relevant numbers starting to climb, but months in advance. Similarly, if you want to head off an impending recession, then you should not wait for unemployment to start rising or for inflation to fall all the way back to its target. You should ease off well before that point.

By that reasoning, critics may be right to say that in retrospect, the Fed would have better controlled inflation had it started to tighten earlier than the spring of 2022. However, continued tightening into 2023 could equally turn out to be a mistake. To see why, we need to understand the role the inflation expectations play in the making of monetary policy.

Forecasting and expectations. In a world with lags, optimal policy calls for action in advance of economic turning points. For that reason, some economists maintain that “inflation targeting” should instead be called “inflation-forecast targeting.” Under such a policy, central banks would cautiously adjust interest rates to keep inflation as close as possible to its forecast path, rather than waiting to raise rates until inflation got out of control.

That being the case, one argument for targeting core inflation is that the core reflects underlying trends in the economy. In contrast, indexes that are strongly affected by the flexible prices of items such as food and energy are more subject to random exogenous shocks. At the same time, central banks should closely monitor inflation expectations, which can be thought of as the inflation forecasts of consumers and producers.

In a methodological paper linked from the home page of the Atlanta Fed’s sticky price index, Michael F. Bryan and Brent Meyer argue that sticky prices have especially close links both to expectations and to future inflation outcomes. In particular, they show that an index of sticky prices provides more accurate forecasts 3, 12, and 24 months ahead than does an index of flexible prices.[2]  However, the correlations they observe do not necessarily constitute an argument for using either sticky prices in general or supercore prices as a policy target, nor do they make such an argument.

In particular, it seems questionable whether the relatively high rate of supercore inflation in early 2023 was primarily driven by expectations. Look at the far-right tail of the supercore series in Figure 2. Between May 2021 and May 2022, the relative supercore index dropped by 25 points – its sharpest drop ever. Although it began to recover just a bit in the second half of the year, by February, the relative supercore index had recovered only about a third of the amount by which it had dropped below trend. That being the case, ongoing price increases in the supercore sector may not, after all, reflect service providers’ expectations of ongoing inflation in the economy as a whole. Rather, they may simply be trying to get their heads back above water after two years in which their own prices spectacularly failed to keep up with the rise of  wages and the prices of material goods.

If observed correlations among supercore prices, expectations, and near-term inflation outcomes turn out to not to be causal in nature, any attempt to use supercore prices for forecasting or targeting risks running afoul of Goodhart’s law. According to that principle, statistical relationships tend to break down when they are used for policy purposes. The demise of the quantity theory of money and the subsequent abandonment of money-supply targets by central banks are often cited as a case in point.

The health of the supercore. But Goodhart’s law to one side, shouldn’t we welcome the Fed’s efforts to smother inflation in the last stronghold where it survives? As consumers, don’t we consider low bus fares and manicure prices good things in themselves? The answer, I think, is yes – as long as firms remain able to provide a steady supply of high-quality services. But if relative prices of supercore services stay low indefinitely even while their costs have risen, suppliers will sooner or later come under real pressure.

Consider wages. According to the most recent data, 85 percent of privately-employed workers are employed in the service sector and just 15 percent in the production of goods. However, since workers are free to move back and forth between the two, relative wages in the goods and service sectors tend to be more stable than relative prices. In fact, between mid-2021 and mid-2022, while the relative supercore price index was dropping like a stone, wages in the service sector as a whole actually rose fractionally relative to wages of goods-producers.

Clearly, the combination of stable relative wages and dramatically falling relative prices puts the service sector under pressure. Add to that the fact that service firms need many non-labor inputs, such as fossil fuels and motor vehicles, that are sold by goods-producers. Further, add the fact that demand for goods recovered more rapidly from the pandemic than did the demand for services, and you get a picture of a sector at risk. Its cost-price squeeze is going to continue until relative supercore prices claw back at least a good part of the amount by which they have fallen below trend. It hardly seems like the right moment to single out nonhousing service prices for special restraint.

The bottom line

On the whole, I am enthusiastic about the Fed’s incipient moves away from old-style Phillips curve models that lump all prices together as a single variable, whether that is the CPI, the PCE, or something else. In that regard, Powell’s division of prices into goods, shelter, and nonshelter services is a step in the right direction. More detailed models could divide prices into a greater number of buckets, add input-output relationships among sectors, and include other details.

In my opinion, such models are likely to strengthen the case for a more flexible approach to inflation targeting in times of high relative price volatility like the past few years. Yes, it would be great to “Whip Inflation Now,” as a mid-70s policy slogan put it. However, if the current pattern of relative prices is out of whack, freezing it in place may not be a great idea. It would be worth considering giving more leeway for relative price adjustment even though that might slow the rate at which overall inflation returns to target. If the market turmoil that followed the failure of SVB causes the Fed to rethink its plans for further monetary tightening, that may turn out to be a good thing.

[1] A statistical test confirms the visual impression that low values for the relative supercore index are associated with volatile flexible-price inflation. The standard deviation over a moving two-year period of the monthly increase or decrease in the flexible CPI can serve as a measure of volatility. The correlation between that measure and the relative supercore index is negative and statistically significant (R = -.78).

[2] Their paper was published in 2010. It will be interesting to see how their results hold up when more recent data is include


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Small Bank Insiders Are Buying Shares In Their Companies At A Near Record Pace

Small Bank Insiders Are Buying Shares In Their Companies At A Near Record Pace

On a day when the euphoric AI mania is taking a break (which…



Small Bank Insiders Are Buying Shares In Their Companies At A Near Record Pace

On a day when the euphoric AI mania is taking a break (which hasn't stopped the Nasdaq from hitting fresh 52 week highs), market flows have reversed modestly out of tech and into small caps, which are surging and reversing just a little of that record QQQ/RTY skew ...

... on the back of aggressive buying of energy (which had been shorted furiously for the past few months) and especially small banks, with the KRE exploding higher, and rising for a 3rd straight week.

And while we wait until today's 4:15pm release of the latest bank deposit and loan data to see if such buying is indeed justified at a time of a persistent bank jog, there is a group of investors that isn't waiting: bank insiders are buying shares in their own companies at the fastest pace since the covid crash, a strong vote of confidence in the industry after the collapse of four regional lenders earlier this year.

While one can debate if management knows something that others don't, and as a reminder the management of SVB and FRC were completely clueless about what was coming and lost everything in just days, the number of buyers has already jumped to 778 in the second quarter through May 26 from 524 in the first three months of the year, according to Bloomberg which cites data from research firm VerityData, and which said the surge is being driven by small and midsize banks. More purchasers stepped up even as share prices sank to multiyear lows in early May.

Another measure of insider sentiment is the buyers-to-sellers ratio, which compares unique insider buying to unique insider selling. The average quarterly ratio for banks since 2011 has been 1.8 to 1, according to the report. So far in the second quarter, the ratio is at a record high of 14.7 to 1.

“Insiders in this group are expressing a strong belief that the regional-banking system as a whole is sound, that there’s not a danger of a wide-scale collapse,” Ben Silverman, director of research at VerityData, said in a Bloomberg interview.

“This is the type of insider signaling you want to see in a sector when it goes down,” Silverman said. “As an investor, if you feel that these are good banks that will be here for the long run, then it’s a buying opportunity.”

“This signifies long-term confidence in these banks’ ability to weather whatever near-term storm there might be.”

In theory, yes it does, but is that merely to convince others to also buy (herd psychology works damn well in such cases), or is it because management actually believes that their stock prices are undervalued. Or, perhaps, management knows nothing and is simply hoping that the Fed will not let any more banks fail.

Whatever the answer, insiders aggressively bought shares of their own companies following the collapse of regional banks including SVB Financial Group’s Silicon Valley Bank in March, pausing only when rules barring insider trading near the release of quarterly results kicked in at the end of the quarter. Buying steadily increased again when the trading window reopened, with May levels exceeding March, according to the data.   

The second quarter has so far been the most active period for insider buying in the industry since the first three months of 2020, when stock prices plummeted at the onset of the Covid-19 pandemic, according to the report.

Tyler Durden Fri, 06/02/2023 - 15:40

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Jobs data shows the truth about the labor market

Follow the trend to understand Friday’s jobs data, which showed 339,000 jobs were created in May while the unemployment rate increased.



We’ve had some odd job reports over the years, but the key is to always follow the trend. That’s especially important with Friday’s data, which showed 339,000 jobs were created in May even while the unemployment rate increased.

As someone who wrote that we should get job openings toward 10 million in this expansion, I am always mindful of my other labor talking point. If COVID-19 didn’t happen, the total employment numbers in the U.S. today should be between 158 million and 159 million, or in a weaker labor market growth scenario, between 157 million and 158 million.

Today, we stand at 156,105,000, so I think we are still in make-up mode until we reach a range acceptable to a fast economic recovery.

That’s why the jobs data has beaten expectations 14 months in a row. What the U.S. has that other countries don’t is a massive young workforce. While population growth is slowing here, we have the demographic muscle that other countries don’t have — if we didn’t have that, our economic discussion would be different.


Now let’s look at the labor market on all fronts from the data we got this week to get a comprehensive view of the labor market today. On Friday the BLS reported job growth came in at 339,000, with positive revisions, while the unemployment rate went higher, as there was a drop in self-employed workers.

From BLS: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3 percentage point to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.

Hours worked have fallen in the last few months, and wage growth is slowing. The fear of 1970s-style inflation was that wages could grow out of control in a tight labor market. In theory, 2022 and 2023 are tight labor markets and wage growth is slowing down. This trend should continue for the next 12 months as well.


Here is a breakdown of that data for those aged 25 and older:

  • Less than a high school diploma: 5.7% (2 months ago, 4.8%)
  • High school graduate and no college: 3.9%
  • Some college or associate degree: 3.2%
  • Bachelor’s degree or higher: 2.1%.

The noticeable data line here is that the unemployment rate for those without a high school education is up almost 1% from two months ago.


Here is the breakdown of the jobs created this month, another big month for the government, which typically doesn’t continue at this pace. Construction labor has held up very well, even though housing permits have been falling for some time. The backlog from COVID-19 has been a jobs program for the U.S. as we are still slowly growing the housing completion data.


So the BLS jobs report is still pushing along, while wage growth is slowing down. Jobs Friday is one piece of the labor pie — we have two other data lines that we always need to keep an eye on to know the health of the labor market: job openings and jobless claims.

As the only person on Earth who talked about job openings data getting to 10 million in this recovery, I am surprised that job openings data is still around that mark. But that is off the recent highs of 12 million.


At this point of the economic expansion, I am putting more weight on jobless claims data than job openings (JOLTS). For me, the Fed doesn’t pivot, or the 10-year yield doesn’t break under 3.21%, until jobless claims break over 323,000 on the four-week moving average, and that isn’t happening either.

As we can see below, the Gandalf line in the sand has held up the entire year, even though it was tested many times.


As we can see below, the jobless claims four-week moving average is still far from breaking over 323,000. I chose that number using many different variables as I think when we crack about that level, it will be noticeable to everyone — even the Fed — that the labor market has broken.

From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.


It’s important to understand the labor dynamics of this economic expansion. We had such a shock in the economy with COVID-19 and a strong labor market recovery that the make-up labor demand, which doesn’t get talked about much, is a significant reason we still see healthy numbers.

Also, it’s essential to understand the demographic difference now and what we had to deal with after 2008. The Baby Boomers are leaving the labor market, and every month that happens, they need to be replaced if demand is growing. This is why having a healthy number of younger workers not only helps with that but also provides replacement consumers, as those who leave the labor market tend to consume a bit differently than younger workers.

At this stage of the economic cycle jobless claims is the data line that matters most. Once jobless claims break above 323,000, then and only then I believe we can talk about a Fed pivot — first in their language and then possibly with rate cuts.

The Federal Reserve is scared to death of the 1970s inflation, and they genuinely believe that breaking the labor market is the best way to prevent that type of inflation from happening. As a country, we are fighting against a group of people stuck in the wrong decade with their economic mindset on inflation.

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Bitcoin ‘big move’ due in July after March $30K push — Latest analysis

Bitcoin has been busy “perfectly” mimicking its moves after the March 2020 crash, QCP Capital argues.
Bitcoin “consolidation”…



Bitcoin has been busy “perfectly” mimicking its moves after the March 2020 crash, QCP Capital argues.

Bitcoin “consolidation” could end by July, new research predicts as optimism over a BTC price breakout returns.

In its latest market update on June 2, trading firm QCP Capital revealed a bullish bias on both Bitcoin  (BTC) and the largest altcoin, Ether (ETH).

QCP Capital: Bitcoin consolidation “played out perfectly”

Bitcoin price has been ranging between $26,000 and $31,000 since mid-March, but analysts are increasingly calling time on the sideways action.

QCP Capital is among them, predicting a change of course as soon as the end of the month.

This, it argues, is thanks to the United States debt ceiling “sideshow” vanishing, leaving Bitcoin closely mimicking its consolidation and breakout phase from 2020.

“With the passage of the Debt ceiling bill through the House and Senate that extends the ceiling until Jan 2025, we can now all move on and not have to worry about any political sideshow again until next year’s US Presidential elections,” it wrote.

“This means we now return to our regular programming of proper macro and crypto narratives.”

For QCP, the price levels may be different, but the underlying behavior is the same in 2023 as at the start of the COVID-19 pandemic.

Back then, the Federal Reserve unleashed a giant $4 trillion worth of liquidity, buoying risk assets and ultimately sending Bitcoin to new all-time highs.

“In March 2020 we were on the verge of a massive price breakdown below 5k when the Fed unleashed the liquidity tap, resulting in an exponential price increase as we approached the halving cycle the following year,” it wrote, quoting a previous edition of its “Just Crypto” newsletter series.

“Similarly in March 2023, we were about to break below 20k on BTC as a result of the banking crisis risk-off, when the Fed again unleashed the liquidity tap to drive us back above 30k, as we head into the next halving cycle next year.”

Should the relationship continue to play out, the next phase is obvious: a dramatic exit of the trading range, with QCP positioning long options plays.

“This consolidation has played out perfectly so far, but we expect that we are soon coming close to the end sometime this month. As a result, we recommend positioning for an upcoming big move through long 3m and 6m strangles here, with a bias to the long call side,” it added.

An accompanying chart showed the month of June as a hotspot for both BTC and ETH volatility from 2019 onward.

3-month “at-the-money” volatility chart for BTC, ETH (screenshot). Source: QCP Capital

Betting on a BTC price breakout

As Cointelegraph reported, other signals coming from Bitcoin point to a new paradigm taking over shortly.

Related: Bitcoin wicks down to $26.5K, but trader eyes chance for ‘bullish surprise’

These include an on-chain metric tracking hodler behavior, which in late May put BTC/USD in a “transition” phase away from “capitulation” and on the way to “euphoria.”

Multiple market participants, meanwhile, argue that BTC price action is at a critical stage, with a decision on its trajectory now due.

BTC/USD traded at near $27,000 on June 2, data from Cointelegraph Markets Pro and TradingView showed, having ended May down 7%.

BTC/USD 1-day candle chart on Bitstamp. Source: TradingView

Magazine: AI Eye: 25K traders bet on ChatGPT’s stock picks, AI sucks at dice throws, and more

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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