We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of November 2021. Overall, November was a very strong month. We estimate that in November core CPI has been driven by a strong “Covid-effect”, while the idiosyncratic effect is negligible. The common component is estimated positive and relative strong.
Results
Figure 1 shows the decomposition of the MoM of CPI excluding food and energy items in the “common” component (the blue bars), the “idiosyncratic” component (the yellow bars), and the “Covid” effect (the green bars). Our model estimates that in November the common component increased by 23bps (1bps more than in October). The Covid effect is estimated positive and large (29bps). Finally, the idiosyncratic part is negligible.
Today’s reading brings the YoY of the common component to 2.4 percent, one tenth higher to rounding than the previous month (Figure 2 and 3). At the same time today’s reading brings both the 3m/3m a.r. and the 6m/6m a.r. of the common component at 2.4% (Figure 4), in line with recent months.
Comment
The results of the CI-C model complement the evidence of the monthly distributions. In recent months (Figure 1), monthly readings of core CPI have been pushed up by a relative strong common component, as well as by positive Covid effects and positive idiosyncratic shocks. The negative news for the Fed staff is that the common component should prove persistent (by construction) going forward. Therefore, it remains hard to think that in 2022 the YoY of the common component will drop below 2 percent. Nevertheless, the positive news for the Fed staff is that the idiosyncratic shocks have been -on net- positive in the last 9 months. Therefore, it is plausible that in the next few months we will see negative monthly contributions from the idiosyncratic part which could help mitigating some of the core CPI MoM readings.
Overall, we conclude reinforcing the message contained in our previous update (“Model update: monthly distributions of core CPI prices”): today’s CPI report is undoubtedly strong but there are signs of stabilization that suggest things should improve going forward.
Figures
Figure 1 Contributions to MoM changes of CPI excluding food and energy items
Note: the Figure shows the decomposition of the MoM percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI-C model, a 2-stage OLS-LASSO regression model. The “Covid” effect is identified with price variations outside the 10th-90th percentiles of each item pre-Covid price change distribution.
Figure 2 Contributions to YoY changes of CPI excluding food and energy items
Note: the Figure shows the decomposition of the YoY percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI-C model, a 2-stage OLS-LASSO regression model. The “Covid” effect is identified with price variations outside the 10th-90th percentiles of each item pre-Covid price change distribution.
Figure 3 YoY of CPI prices excluding food and energy items and the “Common” component of the CI-C model
Note: the Figure shows the YoY of CPI excluding food and energy items (black line), and the YoY of the “common component” (blue line) estimated using our CI-C model.
Figure 4 Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI-C model.