QI TAKEAWAY — The Fed is targeting lower supercore inflation. Besides loosening the labor market, part of the goal is likely to slow – even cut – spending for certain core services, like travel and education. Best to be in a noncorrelated sector like utilities to watch this play out.
- The most recent FOMC minutes make it clear that the Fed will continue to tighten so long as core services ex housing inflation remains high; this “supercore” inflation, which accounts for roughly half of consumer spending, is still north of 4%, double the Fed’s 2% target
- From 2010 to 2023, the component of core services spending with the highest correlation to “supercore” was foreign spending in the U.S., at 0.78; post-COVID, this metric has tracked “supercore”, plateauing in late 2021 before falling at the end of 2022 as the dollar strengthens
- The second-closest correlation with “supercore” was with education, at 0.72, and while it is traditionally non-cyclical, past recessions have seen real education spend fall; in contrast, the least-correlated areas were two staples, household maintenance and utilities, both below 0.1