Less bad than what it looks like
Nevertheless, we expect the Fed to go ahead and announce tapering at the December meeting
We have updated our estimates of (core) CPI price changes distributions to include the month of November 2021.
While the recent acceleration of the index excluding food and energy items has been heavily influenced by outliers, the price increases are now more widespread. Having said so, the details of today’s report are less concerning than the headlines. Indeed, there are finally signs that large increases are less frequent and that the overall distribution of core CPI price changes is not drifting higher.
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 November despite the large MoM increase (0.5%), all percentiles (excluding Pct5) shifted downward. In other words, the large MoM increase does not appear to be driven by an upward shift of the distribution as observed in recent months. Also, the standard deviation of price changes ticked down, indicating less price dispersion.
- The 5th pct is -17.9% (from -23.2%)
- The 10th pct is -14.6% (from -12.5%)
- The 25th pct is -4.4% (from -1.6%)
- The 50th pct is 2.3% (from 3.4%)
- The 75th pct is 11.6% (from 14.0%)
- The 90th pct is 21.9% (from 25.3%)
- The 95th pct is 34.2% (from 39.4%)
The Kernel of the last 3 months (Figure 4) that shows a thicker right tail compared to the previous 3 months (and the 3 months prior), although outliers in the right tail are less frequent. The MA(12) of the median (Figure 5) remained broadly unchanged in November (from 2.74 to 2.78 percent), although it remains the highest reading since the pre-Great Recession period.
Implications for the Fed Board staff
Today’s reading has implications for the Fed Board staff which will be forced to revise up its 2021 core PCE price inflation forecast again, as we anticipated in our “Pre December 2021 FOMC Meeting Package”. Overall, in our view this round the Fed Board staff has been upwardly surprised by the incoming data by about 3-4 tenths (in core PCE space). In our view, today’s data should not trigger an upward revision to the Fed Board staff inflation forecast in 2022. Today’s CPI report is clearly very strong; but for the first time in recent months there are positive news from the percentiles of the distribution for the Fed staff. Finally, given today’s reading we now expect the FOMC to announce a faster tapering at the upcoming December meeting.
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.