An astonishing upward move of the median
We have updated our estimates of (core) CPI price changes distributions to include the month of January 2022.
Today’s report showed, once again, a diffuse strengh. The striking evidence is that the median of the distribution jumped up from 5.1% (MoM a.r.) to 9.2% (MoM a.r.). As we said last month, unless the level of durable goods prices will start falling soon, such strengh will most likely continue in the next few months. We continue to believe that the most likely outcome for the March meeting is a 25bps hike. However, we also think that today’s report will set the tone for a very aggressive QT.
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 more frequent and larger than just the outliers at the end of the right tail.
If we look at the percentiles (Figure 3), in January -once again- all percentiles shifted upward. As we have consistently said since last October, the entire distribution of price changes has been shifting to the right. Even more importantly, the Pct50 moved up from 5.1% in December to (an incredible) 9.2% in January. Finally, the standard deviation of price changes (Figure 3) ticked up, although it 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 -15.6% (from -18.7%)
- The 10th pct is -6.1% (from -11.6%)
- The 25th pct is 0.3% (from -0.04%)
- The 50th pct is 9.2% (from 5.1%)
- The 75th pct is 24.1% (from 12.9%)
- The 90th pct is 33.1% (from 23.8%)
- The 95th pct is 40.5% (from 38.7%)
Finally, the Kernel of the last 3 months (Figure 4) continues to show a thicker right tail compared to previous months (which itself should be concerning for the Fed). The MA(12) of the median (Figure 5) increased again in January (from 3.2 to 3.7 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 “January Pre FOMC Meeting” package we assumed that the staff was expecting 35bps increase in core PCE prices in January. However, today’s report will translate in a higher core PCE price reading. As such, in our view the Fed staff is already under pressure to revise up its 2022 Q4/Q4 forecast (which was 2.1 percent in December). At this point, a forecast still close to 2 percent seems out of touch with reality.
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.