The 'supercore' inflation measure shows Fed may have a real problem on its hands

cnbc.com:

A hotter-than-expected consumer price index reading rattled markets Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.

Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem and not as good a gauge of underlying prices.

Supercore accelerated to a 4.8% pace year-over-year in March, the highest in 11 months.

Tom Fitzpatrick, managing director of global market insights at R.J. O'Brien & Associates said that if you take the readings of the last three months and annualize them, you're looking at a supercore inflation rate of more than 8%, far from the Federal Reserve's 2% goal.

«As we sit here today, I think they're probably pulling their hair out,» Fitzpatrick said.

CPI increased 3.5% year-over-year last month, above the Dow Jones estimate that called for 3.4%. The data pressured equities and sent Treasury yields higher on Wednesday, and pushed futures market traders to extend out expectations for the central bank's first rate cut to September from June, according to the CME Group's FedWatch tool.

«At the end of the day they don't really care as long as they get to 2%, but the reality is you're not going to get to a sustained 2% if you don't get a key cooling in services prices, [and] at this point we're not seeing it,» said Stephen Stanley, chief economist at Santander U.S.

Wall Street has been keenly