End of the 1st half
We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of September 2022. Overall, September was a strong month with large Covid effect, a solid “common” component, and a positive idiosyncratic shock.
As in CPI space, our CI-C model estimates that net of Covid and idiosyncratic shocks, the strength of the data is marginally lower. The model estimates that the 3m/3m (a.r.) of common component is the lowest in the last 17 months (see figure 4 below). We still have a long way to normalization because the level of the common component remains well above pre Covid but at the end of the first half… “The Times They Are a-Changin’ “.
Results
Figure 1 shows the decomposition of the MoM of PCE 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 September the common component expanded 20bps, that the idiosyncratic component was positive (10bps), and that the Covid effect was solid (15bps).
Given today’s reading, the YoY of the common component is estimated at 2.6 percent in September, up one tenth to rounding compared to the last month (Figure 2 and 3). Finally, the 3m/3m a.r. and the 6m/6m of the common component (Figure 4) are estimated at 2.4% and 2.5%, respectively in September. As mentioned, the 2.4% of the 3m/3m (a.r.) in September is the lowest level in the last 17 months.
Comment
The CI-C model suggests that net of Covid and idiosyncratic shocks, the common component is slowly trending down. As previously communicated, the common component is persistent by construction; therefore, we continue to expect the data to be solid -on average- in the coming months. Also, we expect the common component to converge back to pre Covid level only gradually over time. Nevertheless, the evidence seems pretty clear: there are signs that the common, most persistent factor across items has turned the corner.
The fight against inflation will be a long one because the process is estimated to have a high persistency. We are at the end of the first half. In our view, in the second half, the Fed will keep rates high long enough and not push them higher than previously communicated.
That should be enough.
Figures
Figure 1 Contributions to MoM changes of PCE excluding food and energy items
Note: the Figure shows the decomposition of the MoM percent changes of PCE 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 PCE excluding food and energy items
Note: the Figure shows the decomposition of the YoY percent changes of PCE 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 PCE prices excluding food and energy items and the “Common” component of the CI-C model
Note: the Figure shows the YoY of PCE 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.