We have updated our estimates of (core) PCE price changes distributions to include the month of April 2022. In April, core PCE prices expanded 34bps, a touch higher than (the upwardly revised) February (30bps) and March (33bps).
The evidence of the distributions in PCE space is close to the one in CPI space. The left shoulder/tail has moved up marginally while the right shoulder/tail has moved down marginally. Importantly, the median is at 4.1% (a.r.), a visible increase compared to March. Overall, today’s data confirm that the distribution has shifted in the last year and it is now centered at around 4% (a.r.). Based on today’s data, we continue to expect strong readings in the next few months.
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/tail in the last 12 months, indicating that price increases have been more frequent and larger than just the outliers at the end of the distribution. The left part of the distribution is (marginally) less thick, indicating that price contractions are less frequent.
If we look at the percentiles (Figure 3), in April the low percentiles moved up while the high percentiles moved down (put it differently: there is less dispersion of price changes). Importantly, the median moved up significantly to 4.1% (a.r.) in April (from 2.4% (a.r.) in March), the 4th highest reading in the last 12 months.
Percentiles details:
- The 5th pct is -22.9% (from -24.5%)
- The 10th pct is -10.1% (from -15.8%)
- The 25th pct is -1.6% (from -1.6%)
- The 50th pct is 4.1% (from 2.4%)
- The 75th pct is 10.5% (from 14.0%)
- The 90th pct is 22.1% (from 32.5%)
- The 95th pct is 38.8% (from 55.5%)
The Kernel of the last 3 months (Figure 4) shows some signs of stabilization, being similar to the distribution of 6 to 9 months ago. However, even from this angle, the distribution of the last 3 months (black line) has a thinner left shoulder/tail and a thicker right shoulder/tail than the distribution of 6 to 9 months ago.
Importantly, the median of the distribution (Figure 5 – left panel) ticked up in April from the “low” March reading (from 2.4% a.r. to 4.1% a.r.). The reading of the median in April is the 4th highest of the last 12 months. The MA(12) of the median (Figure 5 – right panel) ticked up again in April (from 3.55 to 3.6 percent), the highest reading of the last 20 years.
Implications for the Fed staff
In our view, the Fed Board staff is not surprised by core PCE prices because the staff can largely anticipate the reading once it has CPI and PPI data in hand. However, in our view the staff can largely anticipate the market-based portion of core PCE prices, while it remains difficult to estimate upcoming readings of other than market-based (often called “non-market prices”). In February and March non-market prices contracted significantly, putting downward pressure on core PCE prices as a whole. However, as previously discussed, movements in non-market prices contain little signal about future readings of core PCE prices. For this reason, in our view the Fed staff had already discounted the “low” February and March readings and expected some payback in April and subsequent months. Indeed, in April market-based core PCE prices grew at an annual rate of 4.0%, largely in line with core PCE price as a whole (4.2%). In our view, given the evidence of the distributions and given the relative behavior of market-based to non-market prices, the growth rate core PCE prices is currently centered around 4% (a.r.).
In our Pre-May 2022 FOMC Meeting Package we assumed that the near-term forecast of the Fed staff was constructed with an average MoM growth of about 35bps. Today’s data confirm our prior. For this reason, in our view the Fed Board staff has not revised its near-term forecast today and continues to expect about 36bps MoM on average in the next 3 months.
Figures
Figure 1. Distribution of MoM changes (PCE prices ex FE, % a.r.)
Note: the Figure shows the distribution of MoM percent changes at annual rate of PCE prices excluding food and energy items.
Figure 2. Kernel of PCE 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 PCE prices excluding food and energy items.
Figure 3. Percentiles and Standard Deviation of the distribution of MoM changes (PCE prices ex FE, % a.r.)
Note: the Figure shows the MA(12) of the distribution percentiles of PCE prices changes excluding food and energy items (left panel), and the cross-sectional standard deviation (right panel).
Figure 4. Kernel of PCE 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 PCE prices excluding food and energy items (for a total of 183 items).
Figure 5. MA(12) of median price increase (%, a.r.)
Note: the Figure shows the median (%, a.r.) of the distribution of PCE prices changes excluding food and energy items (left panel) and the MA(12) of the median (right panel).
Figure 6. PCE prices market-based excluding food and energy items
Note: the Figure shows the metrics (3m/3m a.r., 6m/6m a.r., YoY, and 2Yo2Y) of PCE prices market-based excluding food and energy items. “a.r.” stands for “annual rate”.