This is the economic buzzword we should all be paying attention to

By Christine Romans, CNN Chief Business Correspondent

If “transitory” was the buzzword for inflation watchers in 2021, this year it’s “supercore.”

Federal Reserve officials and economists were taken to task for dismissing inflation as temporary earlier in the pandemic, so now they’re slicing and dicing inflation data in different ways. The new favorite: supercore inflation.

Supercore inflation refers to prices that rise when workers get paid more for their services. Think haircuts, electrical work and gardening. Those prices are typically less volatile than food and energy and can better indicate the direction of prices in the US economy.

Core services that exclude housing “may be the most important category for understanding the future evolution of core inflation,” Fed Chair Jerome Powell said recently.

That’s a problem: Supercore prices have remained stubbornly high in recent years.

Over the past year, an alphabet soup of otherwise wonky economic statistics have become household names as American families suffered through the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index), PCE (Personal Consumption Expenditures and ECI (Employment Cost Index).

Each of these reports has shown how prices for food and fuel and housing have risen much faster than wages for most of the past year, driven by huge consumer demand coupled with supply chain snags and the war in Ukraine.

The most mainstream of the monthly inflation gauges, CPI, is due out Tuesday. January CPI is expected to have moderated to 6.2%, down from the 6.5% rate in December and far below the summer peak of 9.1%. Core inflation is forecast to have slowed to 5.5% from 5.7% in December.

Taken together, the raft of inflation data shows prices still uncomfortably high, but moving in the right direction.

But White House economists last week highlighted a wage-growth statistic that suggests inflation may not be as strong as the Fed believes. The supercore wage reading has fallen from 8% to just over 5% in January, according to the White House Council of Economic Advisers.

“Supercore inflation was a strong 6.4% on a year-over-year basis through December 2022, but it is moderating,” said Mark Zandi, Moody’s chief economist. For the three months through December, supercore inflation is up only 2.4% annualized, and just 0.9% annualized in the month of December.

Wage growth is also moderating, Zandi said, a good sign for future supercore inflation.

“The Fed focuses on supercore because it includes those prices that are more likely to be driven by the cost of labor, which the Fed can more directly impact through changes in interest rates,” he said.

“Supercore inflation is still way too hot, but it has begun to cool off, and all signs point to it and overall inflation getting back to something more comfortable over the coming 12-18 months,” Zandi told CNN.

But supercore isn’t a perfect gauge

While helpful for economists to drill down on inflation’s drivers, there is a practical drawback to stripping out volatile categories like housing, food and energy: These are non-negotiable expenses for most households.

“Pervasive price pressures across categories of spending that are necessities — shelter, food, electricity, apparel, vehicle insurance, and household furnishings and operations — show that broad-based improvement on the inflation front is still lacking,” said Greg McBride, chief financial analyst at Bankrate.

So there is a risk that January CPI could disappoint, McBride cautioned. Some of December’s rosy headlines came from falling gas prices, which have since reversed.

“The CPI is likely to underscore the feeling that inflation pressures aren’t going to come down easily or in a straight line,” McBride said. “The progress is going to be tougher to come by than what the trend of the past several months would have us believe.”

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