We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of February 2022. Overall, February was another strong month (although a bit softer than the previous four), influenced by a positive Covid effect and a large positive “common” component. The idiosyncratic effect is also estimated positive in February.
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 February the common component expanded 19bps (in line with the previous four strong months), and that the Covid effect is positive although smaller than in previous months (9bps). Given today’s reading, the YoY of the common component is estimated at 2.5 percent in February, one tenth higher than in January (Figure 2 and 3). The 2.5% of the YoY of the common component in February is the highest reading since the beginning of the sample (and the highest over the “anchored” period). Finally, the 3m/3m a.r. of the common component (Figure 4) is estimated at 2.6% in February suggesting that the YoY will most likely tick up going forward.
Comment
The evidence from the monthly distributions matches well the one from our CI-C model. Unless the level of durable goods will start falling soon (therefore offsetting part of the diffuse strengh of the data), the commmon component should continue trending higher in the next few 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 large 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).
The data are cristal clear: the monthly readings are strong and the underlying strenght continues to increase, somewhat.
The Fed has a lot of work to do. The Fed staff should recognize that its 2.6 percent forecast for core PCE price inflation in 2022 does not balance the risks; therefore, we expect the Fed staff to have revised its forecast to a bit above 3 percent. As for the SEP, we continue to expect very hawkish communication until the monthly readings (intended as the MoM of the common component, net of Covid effects) will moderate.
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.