Lessons from Super Core inflation

The US experience in the 1970s was about controlling super core inflation, and service inflation in particular. And it will make the Fed uncomfortable today.

• Acceleration in super core inflation (CPI ex. food, energy, housing and used cars and trucks) in the US since the pandemic is comparable to that witnessed in the 1970s;

• While the inflation rate today remains lower than the peaks then, the inflation target is lower—so that necessary disinflation is comparable;

• Today’s experience therefore resembles the great inflations about 50 years ago—when the control of wage growth and service inflation was crucial for disinflation.

• There is a lot of speculation about an imminent recession in the US, and the need for a Fed pivot. But the experience from the 1970s, and the echos from then in super-core inflation today, will make the Fed reluctant to get dovish too soon.

AS THE JUNE CPI print comes into view, we briefly recall previous periods of inflation pressure in the United States. Indeed, the 1970s saw two periods of sharply accelerating inflation, comparable to ongoing experience.

Super Core compared

In the first, when inflation peaked in 1974 and policy failed to reign in price pressure thereafter, underlying core inflation increased from about 2% pre-shock to about 6%. In the second, which peaked in 1980, the Volcker disinflation (eventually) brought down core inflation from 6% pre-shock to about 4% after.

The chart below shows Super Core inflation (ex. food, energy, housing and used cars and trucks, removing those pesky volatile items) since June 1973 as well as narrowing in on the 5-year windows when inflation accelerated to peak in 1974 and in 1980 and more recently.

As of May, super Core CPI was running about 7% sequentially (4-month trend annualised) and 6%YoY%. While traded goods appear to be rolling over, services are continuing to creep higher (more on this below.)

In addition, while the level of this core inflation measure today is below the 1970s peaks still, the acceleration over the past 2 years is comparable. Take the late-1970s. Super Core increased from 6%YoY in Dec 1978 to about 10% in Sept 1980 before falling to 4%YoY by end-1983. Today, super core has increased from below 1% in Dec 2020 to about 6% today.