We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of February 2022. Overall, February was another very strong month. We estimate that in February core CPI was driven by a large “Covid-effect”, while the idiosyncratic contribution was negligible. Most importantly, our model estimates a very strong contribution of the common component.
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 February the common component increased by 25bps (same as in January, and about 7-8bps more than the pre-Covid monthly average). The Covid effect is estimated positive and large (29bps). Finally, the idiosyncratic part is a small negative (-3bps).
Today’s reading brings the YoY of the common component to 2.7 percent, one tenth higher than the previous month (Figure 2 and 3). At the same time, today’s reading brings the 3m/3m a.r. of the common component at 2.85 percent and the 6m/6m a.r. at 2.7 percent (Figure 4). This 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 trending higher. 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 the YoY of the common component will drop below 2 percent any time soon.
At this point, it is hard to find a single positive news for the Fed staff (and the FOMC). The (only possible) positive news for the Fed staff is that the Covid effect can potentially turn negative going forward if the level of durable goods will fall sharply. The issue, as we explained before, is that the Fed staff (and essentially everyone else) does not know when, and to what extent the level of durable goods will drop (please note that the on-going war in Ukraine is expected to put additional pressure on the already stressed global supply-chains).
In our view the Fed staff and the FOMC itself are playing a risky guessing game. So far the evidence has been against them so we will continue to assume our priors unless otherwise proven.
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.