Very bad. But we are not surprised
We have updated our estimates of (core) CPI price changes distributions to include the month of May 2022.
Today’s report showed diffuse and increasing strength (core CPI came in at 7.8% – MoM a.r.), more than expected and higher than last month. Last month (April) the median was at 4.2% (MoM, a.r.). This month (May) it edged up to 4.5%, one of the highest readings of the last 20 years.
Today’s report confirms a 50bps hike at the next two FOMCs. Based on today’s report we also expect the discussion about a 75bps hike in September to come back.
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 right 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 a bit less frequent.
If we look at the percentiles (Figure 3), in May ALL percentiles shifted upward. This is another clear signal that confirms the evidence of the last few months: the entire distribution is still shifting higher (to the right). The standard deviation of price changes (Figure 3) ticked down but remained elevated.
Percentiles details:
- The 5th pct is -17.4% (from -20.7%)
- The 10th pct is -8.8% (from -13.8%)
- The 25th pct is -0.4% (from -3.1%)
- The 50th pct is 4.5% (from 4.2%)
- The 75th pct is 13.1% (from 11.5%)
- The 90th pct is 28.3% (from 22.3%)
- The 95th pct is 35.9% (from 28.7%)
The shift of the distribution is visible comparing the Kernels of the last 3 months (black line in Figure 4) to the one of 6-9 months ago (red line). Indeed, the average increase in the last two months of core CPI (at 60bps MoM) is the highest since June 2021.
The median of the distribution (Figure 5 – left panel) ticked up in May to 4.5%. The MA(12) of the median (Figure 5 – right panel) is unchanged to rounding in May 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 10bps. The magnitude of the upward surprise is relatively small but it is, once again, an upward surprise (the fourth one since the beginning of the year).
In our “June Pre FOMC Meeting” package we assumed that the staff was expecting 43bps increase in core PCE prices from today’s reading. Today’s report will probably translate in a higher core PCE price reading (to be confirmed with PPI data).
In our view the strengh of today’s data (especially in core services) will force the Fed staff to revise up again its near term forecast and possibly the 2022 Q4/Q4 forecast (from 4.0% to 4.2%). This should (finally) bring the Fed staff forecast in line with our “main” model.
For this reason, we now expect an even more aggressive communication from FOMC members. As we have been stressing again and again, nothing should be ruled out. Repetita iuvant: the entire distribution is still shifting higher and it is now centered around 4%-ish. The Fed can be lucky in a single month (as in March) but overall it will take some effort to disinflate this economy. The fight has just begun!
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).