We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of June 2022. Overall, June was a very strong month. Our model estimates a strong contribution of the common component, above the average of the last 6 months. Net of Covid and idiosyncratic shocks, the strength of the data remains intact (in fact, marginally higher).
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 June the common component increased by 27bps, above the average of the last 6 months and higher than in May. The Covid effect is estimated positive and large (31bps). Finally, the idiosyncratic part is a small positive (12bps).
Today’s reading brings the YoY of the common component to 2.9 percent, marginally higher than the previous months (Figure 2 and 3). At the same time, today’s reading brings the 3m/3m a.r. of the common component at 3.0 percent and the 6m/6m a.r. at 3.0 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. The model is suggesting that net of Covid and idiosyncratic shocks, in June the common component continued to be strong and marginally 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. (reminder: the evidence of the CI-C model should be interpreted as following: net of Covid and idiosyncratic effects, the model suggests that the strengh of the data is way above the Fed target. Therefore, according to the model, the Fed has a lot of work to do to cool down price changes).
As a matter of comparison, we report in Figure 5 core services CPI excluding shelter. This part of consumers prices has a weight similar to shelter and core goods and its price changes are typically persistent.
Over the course of the last 3 months, the price of core services net of shelter has increased at the spectacular rate of 11.5% (3m/3m a.r.) and it is in clear acceleration.
The evidence is clear: there is not a single good news for the Fed in the last three CPI reports.
The Fed has lost another battle.
Time to escalate the conflict.
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.
Figure 5 CPI, all items less food, shelter, energy, and used cars and trucks
Note: the Figure shows the 3m/3m at annual rate (blue dotted line), the 6m/6m at annual rate (blue line), the YoY (blue thick line), and the 2Yo2Y (red line) of CPI services less rent of shelter.