The latest consumer price index (CPI) reading has caught the attention of the market, but it is the supercore inflation gauge that is causing a stir. This specific prices gauge, which measures services inflation excluding food, energy, and housing, has been steadily climbing, reaching a year-over-year increase of 4.8% in March. Furthermore, the supercore gauge has surged at an annualized pace of over 8% in the last three months.

The supercore inflation reading is considered even more crucial than the overall inflation measure as it excludes volatile components such as food and energy prices. Moreover, it goes a step further by excluding shelter and rent costs from its services measurement. This gauge is being closely monitored by economists and market participants who seek to understand the true trend of inflation.

Federal Reserve officials consider the supercore gauge valuable in the current economic climate. They view the elevated housing inflation as a temporary issue, and therefore, it is not a reliable indicator of underlying prices. In March, the supercore inflation rate reached its highest level in 11 months at 4.8%. Some experts even suggest that if the recent readings are annualized, the supercore inflation rate would surpass 8%, significantly higher than the Federal Reserve's target of 2%.

The higher-than-expected CPI reading rattled the markets on Wednesday, leading to increased Treasury yields and putting pressure on equities. Market traders have also adjusted their expectations for the timing of the central bank's first rate cut, extending it from June to September, according to the CME Group's FedWatch tool.

Stephen Stanley, Chief Economist at Santander U.S., warns that sustained 2% inflation will be challenging to achieve without a cooling in services prices. However, currently, such cooling has not been observed. Wall Street has been closely following the trend of supercore inflation since the beginning of the year. Its increase from January's CPI print already raised questions about the Fed's ability to control inflation.

One of the challenges for the Federal Reserve is the unique economic backdrop where demand-driven inflation and robust stimulus payments have boosted discretionary spending in 2021 and 2022, leading to record levels of inflation. Moreover, stubborn components of services inflation, such as car and housing insurance, as well as property taxes, pose further complexity to the situation. The Federal Reserve finds itself in a difficult position due to the non-discretionary nature of these spending items.

Adding to the complexity, the dwindling consumer savings rate and rising borrowing costs make it more likely for the central bank to maintain restrictive monetary policies until a significant development occurs. The concern is that the current drivers of inflation are not as responsive to tighter monetary policy, which diminishes the effectiveness of rate hikes in addressing the rising inflationary pressure.

While Chief Economist Tom Fitzpatrick believes that inflation will eventually come down, he does not expect the Fed to hike interest rates further in the near future. However, he acknowledges that the possibility of rate hikes may come back into focus if inflation remains elevated above the 2% target.

In conclusion, the surge in supercore inflation and the higher-than-expected CPI reading have raised concerns in the market. The Federal Reserve faces the challenge of addressing inflationary pressures while accounting for the unique economic circumstances and stubborn components of inflation. The path forward remains uncertain, as experts debate the timing of rate hikes and the possibility of sustained high inflation.