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, influenced by a large positive Covid effect and a solid “common” component. The idiosyncratic effect is also estimated positive in June.
Looking at the estimates over the last 6 months, the main message is that the common component is now going sideways but on a very high level. Put it differently, the model is suggesting that even depurating from Covid effects, the strengh of the data would be significantly above the Fed target. For this reason, according to the model, there is still a lot of work the Fed needs to do.
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 June the common component expanded 23bps (well above the average of the previous 7-8 months), and that the Covid effect is positive and large (31bps). Given today’s reading, the YoY of the common component is estimated at 2.4 percent in June, unchanged to rounding compared to the last few months (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 2.4%, respectively in June.
Comment
The evidence from the monthly distributions matches well the one from our CI-C model.
The data in the last few months show that the common component has been growing at an average pace of about 2½. This evidence is in line with our trend models which currently estimates the level of the trend at 2.6 percent.
Importantly, the fact that the common component has gone sideways for few months should not be taken as a victory lap for the Fed. Rather, the model is indicating that even net of Covid and idiosyncratic effects, the common/trend component remains strong. In other words, the model is suggesting that even net of Covid-related factors, the underlying pace of the data is not consistent with the Fed target.
In our view, the situation remains serious for the Fed. Given these estimates, pivoting now could seriously derail the disinflation process. The Fed will focus again on the labor market, at some point. But if they follow what they say, this is still the time to focus on inflation.
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.