The median remains incredibly high
We have updated our estimates of (core) CPI price changes distributions to include the month of February 2022.
Today’s report showed, once again, a diffuse strengh. Last month (January) the median (MoM, a.r.) jumped to the incredible level of 9.2%. This month (February) it decreased but only to 7.0%. Therefore, we reiterate the message we have been stressing for several months: unless used car prices will fall rapidly in the next few months, we continue to expect strong readings going forward (around 0.4% in March could be a good guess at the moment).
We continue to believe that the Fed will deliver a 25bps hike at the upcoming FOMC. However, chances or a more aggressive monetary policy (starting in June) are now quite high.
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 February most percentiles shifted downward (although in most cases only marginally). Importantly, the median remained very elevated (at 7.0%). The standard deviation of price changes (Figure 3) was little changed and remains well below last year spikes (which is a bad news for the Fed given the high MoM readings).
Percentiles details:
- The 5th pct is -17.2% (from -15.6%)
- The 10th pct is -5.9% (from -6.1%)
- The 25th pct is 0.3% (from 0.3%)
- The 50th pct is 7.0% (from 9.2%)
- The 75th pct is 19.5% (from 24.1%)
- The 90th pct is 35.7% (from 33.1%)
- The 95th pct is 51.6% (from 40.5%)
The Kernel of the last 3 months (Figure 4) show a visible shift to the right and more frequent positive outliers (which should be concerning for the Fed).
The median of the distribution (Figure 5 – left panel) ticked down in February from the astonishing January reading but remains elevated. The MA(12) of the median (Figure 5 – right panel) ticked up again in February (from 3.7 to 4.1 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. In our “March Pre FOMC Meeting” package we assumed that the staff was expecting 40bps increase in core PCE prices from today’s reading. However, today’s report will probably translate in a higher core PCE price reading (to be confirmed on PPI data). As such, in our view the Fed staff will revised up again its 2022 Q4/Q4 forecast to 2.8%. We continue to expect the SEP forecast for core PCE price inflation (2022 Q4/Q4) at 3.2%.
As mentioned above, in our view today’s CPI report is a bit stronger than expected at the Fed (both, the staff and the FOMC). However, today’s report should not materially change the monetary policy decision of the March meeting. Rather, it has increased the chances of a more aggressive monetary policy starting in June (at this point in our view chances of a 50bps hike in June are as high as 50%).
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).