The Fed cannot wait much longer
We have updated our estimates of (core) CPI price changes distributions to include the month of December 2021.
While the recent acceleration of the index excluding food and energy items has been heavily influenced by outliers, the price increases are now widespread. Today’s report showed, once again, a diffuse strengh. Unless the level of durable goods prices will start falling soon, such strengh will most likely continue in the next 2-3 months. As such, the incoming data should continue to support lift-off as early as March.
Details
The distribution of MoM % changes (Figure 1) suggests that positive and negative outliers have been more frequent in the last 12 months compared to pre-Covid. The fitted Kernel density (Figure 2) shows a shift of the distribution to the right in the last 12 months, indicating that price increases have been a more frequent and larger than just the outliers at the end of the right tail.
If we look at the percentiles (Figure 3), in December most percentiles (excluding Pct5 and Pct10) shifted upward. In other words, while the MoM (0.5%) was already large, it could have been even larger if the left tail did not move downward. Even more importantly, the Pct50 moved up notably: from 2.3% in November to 5.4% in December. Finally, the standard deviation of price changes ticked down, indicating less price dispersion (which is a bad news for the Fed given the high MoM reading).
- The 5th pct is -21.1% (from -17.9%)
- The 10th pct is -16.8% (from -14.6%)
- The 25th pct is -0.5% (from -4.4%)
- The 50th pct is 5.4% (from 2.3%)
- The 75th pct is 13.7% (from 11.6%)
- The 90th pct is 27.5% (from 21.9%)
- The 95th pct is 43.4% (from 34.2%)
Finally, the Kernel of the last 3 months (Figure 4) shows a shift to the right (which itself should be concerning for the Fed). The MA(12) of the median (Figure 5) increased again December (from 2.78 to 3.1 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 upwardly surprised once again by the incoming data. The Fed staff has sent a clear signal to the FOMC last round (upward revision of underlying inflation), as per the December FOMC minutes. The incoming data are supportive of the thesis that the trend of the series is now a bit higher than it was pre-Covid. The FOMC should recognize the status of the US economy, as reflected by the incoming data and should start tightening soon.
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. MA(12) of median CPI price increase (%, a.r.)
Note: the Figure shows the MA(12) of the median of the distribution of CPI prices changes excluding food and energy items.