What is core services ex-housing inflation?

Core services excluding housing, frequently called "supercore" inflation, is a narrower measure of inflation that removes food, energy, goods prices, and shelter costs from the overall index. What remains is the inflation rate for labor-intensive services like healthcare, haircuts, auto insurance, financial services, education, and restaurant meals. Federal Reserve Chair Jerome Powell highlighted this measure in 2022 and 2023 as the most important indicator for assessing underlying inflation pressures.

The logic behind isolating this category is straightforward. Goods inflation is driven largely by supply chains and commodity costs, which the Fed has limited ability to influence. Shelter inflation is driven by housing markets and tends to lag actual rent trends by 12 to 18 months due to methodological lags in how the Bureau of Labor Statistics measures it. By stripping both out, core services ex-housing provides a cleaner read on the inflation pressures that are most responsive to labor market conditions and therefore most within the Fed's ability to manage through monetary policy.

The connection to the labor market is what makes this measure so important. Services like dining out, medical care, auto repair, and personal care are labor-intensive, meaning wages represent a large share of their total cost. When labor markets are tight and wage growth is elevated, these service prices tend to rise. This is why the Fed cannot be comfortable with the inflation outlook until this measure is decelerating toward levels consistent with 2% overall inflation, roughly 2.5-3% year-over-year for the PCE version.

Tracking supercore inflation requires some care because the CPI and PCE versions differ. The PCE measure excludes shelter and energy services, while the CPI version excludes shelter but can be calculated different ways. Both showed stubborn persistence through 2023 and into 2024 even as goods disinflation accelerated, validating the Fed's caution about declaring victory on inflation. This category remains the key measure to watch for signals about when the Fed will feel confident enough to cut rates meaningfully.