Not a single good news for the Fed
We have updated our estimates of (core) CPI price changes distributions to include the month of April 2022.
Today’s report showed diffuse strength again (core CPI came in at 7.0% – MoM a.r.), even higher than most expected (including ourselves). Last month (March) the median (MoM, a.r.) was at 3.6%. This month (April) it edged up to 4.2%, one of the highest readings of the last 20 years.
Today’s report should confirm a 50bps hike at the next FOMC but at this point is putting a 75bps hike on the table (if not in June, possibly in July).
Details
The distribution of MoM % changes (Figure 1) suggests that positive outliers have been more frequent in the last 12 months compared to pre-Covid. The fitted Kernel density (Figure 2) shows a thicker shoulder in the last 12 months, indicating that price increases have been more frequent and larger than just the outliers at the end of the right tail. The left part of the distribution is less thick, indicating that price contractions are less frequent.
If we look at the percentiles (Figure 3), in April the low percentiles shifted upward, but the high percentiles shifted downward. In other words, the high reading of April is not driven by outliers but by a significant rightward shift of the bottom part of the distribution (which is a very bad signal for the Fed because it implies a diffuse strength, and not a reading driven by some outliers). At the same time, the median ticked up to 4.2% (from 3.6%). The standard deviation of price changes (Figure 3) spiked up, indicating price dispersion (another very bad signal for the Fed).
Percentiles details:
- The 5th pct is -20.7% (from -24.8%)
- The 10th pct is -13.8% (from -15.3%)
- The 25th pct is -3.1% (from -2.8%)
- The 50th pct is 4.2% (from 3.6%)
- The 75th pct is 11.5% (from 11.6%)
- The 90th pct is 22.3% (from 31.1%)
- The 95th pct is 28.7% (from 55.2%)
The impressive shift of the distribution is visible in the Kernels of the last 3 months (Figure 4). The black line (last 3 months of data) has moved further to the right compared to the previous 3 months (yellow line) and to 6-9 months ago (red line). This is a very bad news for the Fed because it indicates that the distribution is still clearly moving higher with no imminent stabilization.
The median of the distribution (Figure 5 – left panel) ticked up in April. The MA(12) of the median (Figure 5 – right panel) is unchanged in April (to 4.2 percent), the highest reading of the last 20 years.
Implications for the Fed Board staff
Today’s reading has implications for the Fed Board staff which, in our view, has been upward surprised by the data by about 15bps. The magnitude of the upward surprise is relatively small but it is, once again, an upward surprise (the third one since the beginning of the year).
In our “May Pre FOMC Meeting” package we assumed that the staff was expecting 40bps increase in core PCE prices from today’s reading. Today’s report will probably translate in a slightly higher core PCE price reading (to be confirmed with PPI data).
Having said so, the strengh of today’s data (especially in core services) will force the Fed staff, in our view, to revise up its near term forecast and possibly the 2022 Q4/Q4 forecast marginally (from 3.7% to 3.8%/3.9%), bringing the Fed staff forecast closer to our “main” model.
For this reason, we now expect an even more aggressive communication from FOMC members. After this report, nothing should be ruled out. In fact, once again, the evidence is piling up against the Fed staff and the FOMC.
Figures
Figure 1. Distribution of MoM changes (CPI prices ex food and energy items, % a.r.)
Note: the Figure shows the distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 2. Kernel of CPI excluding food and energy items changes (%, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 3. Percentiles and Standard Deviation of the distribution of MoM changes (CPI prices excluding food and energy items, % a.r.)
Note: the Figure shows the distribution percentiles of CPI prices changes excluding food and energy items (left panel), and the cross-sectional standard deviation (right panel).
Figure 4. Kernel of CPI price changes excluding food and energy items (%, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items (for a total of 183 items).
Figure 5. Median CPI price increase (%, a.r.) and MA(12) of the median
Note: the Figure shows the median (%, a.r.) of the distribution of CPI prices changes excluding food and energy items (left panel) and the MA(12) of the median (right panel).