‘Supercore’ inflation measures show the Fed may actually have a problem.

Hotter-than-expected consumer price index numbers rattled markets Wednesday, but markets are buzzing about a much more specific price indicator included in the data: the so-called supercore inflation numbers.

Economists look at core CPI, excluding volatile food and energy prices, along with overall inflation measures to find true trends. The Supercore gauge takes this one step further by also excluding shelter and rental costs from service readings. Fed officials say this is useful in the current environment as they view the rise in housing inflation as a temporary problem and not a good gauge of underlying prices.

Supercore accelerated to a 4.8% year-on-year pace in March, hitting an 11-month high.

Tom Fitzpatrick, managing director of global market insights at RJ O’Brien & Associates, said annualizing the figures for the past three months puts the supercore inflation rate at more than 8%. Federal Reserve’s 2% target.

“I think they’re probably pulling their hair out as we sit here today,” Fitzpatrick said.

Last month, CPI rose 3.5% compared to the same period last year, exceeding the Dow Jones estimate of 3.4%. The data put pressure on stocks, pushing Treasury yields higher Wednesday and putting pressure on futures market traders to extend expectations of the central bank’s first interest rate cut from June to September, according to CME Group’s FedWatch tool.

“At the end of the day, they don’t really care as long as it gets to 2%, but realistically you won’t be able to sustain 2% unless service prices cool significantly, (and) at this point we don’t see that,” said Santander US chief economist. Stephen Stanley said:

Wall Street has been closely watching trends caused by supercore inflation since the beginning of the year. The higher rise in January’s CPI data was enough to disrupt the market’s perception that the Fed was winning the fight against inflation, which could be an unresolved issue for months to come, said BMO Capital Markets’ head of U.S. rates. It will remain,” said strategy Ian Lyngen.

Fitzpatrick says another challenge for the Fed lies in the different macroeconomic backdrops of demand-driven inflation and strong stimulus that could trigger record inflation levels while encouraging consumers to increase discretionary spending in 2021 and 2022.

He added that the situation is more complicated because some of the most stubborn components of services inflation today are household necessities such as car insurance, home insurance and property taxes.

“They’re so afraid of what happens in 2021 and 2022 that they don’t start from the same point as they would otherwise,” Fitzpatrick added. “The problem is that when you look at all of this (together), these are not discretionary spending items (and) that puts them between a rock and a hard place.”

To further complicate the picture, falling consumer savings rates and rising borrowing costs mean central banks are likely to maintain restrictive monetary policy “until something breaks,” Fitzpatrick said.

He warned that the Fed will have a hard time lowering inflation with more rate hikes because current drivers are more persistent and less sensitive to tighter monetary policy. Fitzpatrick said the recent movement toward higher inflation is more akin to tax increases.

Stanley says the Fed is still far from raising interest rates further, but it would still be possible to do so as long as inflation remains above its 2% target.

“By and large, inflation will decline and interest rates will be cut later than we thought,” Stanley said. “The question is, are we seeing something solid here? I think at some point the potential for rate hikes will come back into focus.”