(Note: unfortunately, the BLS did not publish one series in the CPI database. Therefore, our model estimates are based on our reconstruction of that series. We will update you again about the CI-C model results but only if the final results will be significantly different. In any case, we do not expect the results to change materially).
We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of December 2021. Overall, December was another very strong month. We estimate that in December core CPI has been driven by a solid “Covid-effect”, and by a large idiosyncratic effect. The common component is estimated positive and 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 December the common component increased by 21bps (2bps less than in November, still on the solid side). The Covid effect is estimated positive and solid (18bps). Finally, the idiosyncratic part is also estimated positive and large (15bps).
Today’s reading brings the YoY of the common component to 2.4 percent, unchanged to rounding from the previous month but higher than the the previous two months (Figure 2 and 3). At the same, time today’s reading brings the 3m/3m a.r. of the common component at 2.5 percent and the 6m/6m a.r. at 2.447 percent (Figure 4). This last evidence suggests that the YoY of the common component will probably tick up again in the upcoming months.
Comment
The results of the CI-C model complement the evidence of the monthly distributions. There is no doubt that even net of Covid effects, the common component is increasing at a solid pace and certainly above the Fed target. As previously communicated, the common component is persistent by construction; therefore, we continue to expect the current strengh of the data to persist in the coming months. For this reason, it remains hard to think that in 2022 the YoY of the common component will drop below 2 percent.
The (only) positive news for the Fed staff is that the Covid effect can potentially turn negative in some months of this year and offset the strenght of the common factor. The issue, in our view, is that the Fed staff (and essentially everyone else) does not know if, when, and to what extent the level of durable goods will drop. Put it differently, in our view the Fed staff is now playing a risky game because it is assuming (or even worse hoping) that supply chain issues will be solved fast enough.
We conclude by stressing an old saying: “hope is not a strategy“. Fortunately, it seems that the FOMC is finally elaborating a strategy and should implement it soon.
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.