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, influenced by a large positive Covid effect but also a large positive “common” component. The idiosyncratic effect is also estimated positive and large in November.
Results
Figure 1 shows the decomposition of the MoM of PCE excluding food and energy items in the “common” component (the blue bars), an “idiosyncratic” component (the yellow bars), and the “Covid” effect (the green bars). Our model estimates that in November the common component expanded 19bps, and the Covid effect is also estimated to be positive and large (12bps). Given today’s reading, the YoY of the common component is estimated at 2.2 percent in November, one tenth higher to rounding than the previous month (Figure 2 and 3). The 2.1% of the YoY of the common component in November is the highest reading since the beginning of the sample (and the highest over the “anchored” period). Finally, the 3m/3m a.r. and the 6m/6m a.r. of the common component are estimated both at 2.3% in November (Figure 4), suggesting that the YoY will most likely trend higher in the next few months.
Comment
We continue to believe that the current inflationary pressures are widespread. We also believe that that the inflationary pressures will continue going forward, at least for another 2-3 months. In our estimates, the Covid effect is currently contributing to the YoY of PCE ex FE by about 1.8 percentage points but we also estimate a non-negligible marginal contribution of the common component which, by construction, should prove persistent going forward and which continues to run above the pre-Covid levels (and increasing).
In our view, at this point, it has become very hard for the Fed staff to ignore the evidence. We expect the Fed staff to start revising its core inflation forecast for 2022 soon, either in December or as early as January.
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.