We have updated our Common-Idiosyncratic and Covid (or CI-C) model to include the month of October 2021. Overall, October was a very strong month. Having said so, the high core CPI reading has been influenced by a strong “Covid-effect” and a positive idiosyncratic effect. Nevertheless, the common component is estimated to be relatively strong.
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 October the common component expanded 21bps, and the Covid effect is also estimated to be positive and quite large (22bps) –Figure 1. Given today’s reading, the YoY of the common component is estimated at 2.3 percent in October, one tenth higher to rounding than the previous four months (Figure 2 and 3). At the same time the 3m/3m a.r. and the 6m/6m a.r. of the common component are estimated at 2.3% and 2.4%, respectively in October (Figure 4).
Comment
We continue to believe that the current inflationary pressures are a more widespread than perceived by some, possibly by the Fed itself. In our estimates, the Covid effect is currently contributing to the YoY of CPI ex FE by about 2 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).
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.