We have updated our estimates of (core) PCE price changes distributions to include the month of December 2021.
The evidence in PCE space is a bit different than the one in CPI space. Notably, today’s report showed a strong reading of core PCE prices, despite a downward movement of both tails. Put it differently, today’s strenght is even more impressive than what it looks like on the surface because it comes from items around the median of the distribution. As such, today’s strong report signals possible additional strengh in the near-term.
Details
The distribution of MoM % changes (Figure 1) suggests that positive and negative outliers have been more frequent in 2021 compared to pre-Covid. The fitted Kernel density (Figure 2) shows a thicker right tail in the last 12 months, indicating that price increases have been more frequent and larger than just the outliers in the right tail.
If we look at the percentiles, in December we get a mixed bag: most percentiles moved downward but the median moved up significantly. Price dispersion (captured by the cross sectional standard deviation) dropped to its lowest reading since the beginning of the pandemic (which is not necessarily encouraging for the Fed because it is combined with a strong median reading).
Importantly, as already mentioned, the median moved up from 3.6% (MoM a.r.) in November to 4.5% (MoM a.r.) in December.
In details (MoM a.r.):
- The 5th pct is -24.7% (-23.1% in Nov)
- The 10th pct is -15.9% (-10.5% in Nov)
- The 25th pct is -1.5% (-0.5% in Nov)
- The 50th pct is 4.5% (3.6% in Nov)
- The 75th pct is 9.5% (12.1% in Nov)
- The 90th pct is 21.0% (27.2% in Nov)
- The 95th pct is 34.5% (44.8% in Nov)
The increase of the p50 is reflected in the MA(12) of the median (Figure 5) that increased to 3.1% in December (from 2.9% in November), the highest reading in the last 25 years (and higher than our expectations after the December CPI report).
Implications for the Fed staff
The Fed Board staff is typically not surprised by core PCE prices because the staff can anticipate the reading once it has CPI and PPI data in hand. Having said so. as described above, today’s data showed strong readings around the median of the distribution (at 4.5% a.r.).
In our view the Fed staff has not revised its near-term forecast for the next 3 months (leaving it at around 35bps per month) but we now think that the risks around this forecast are skewed to the upside.
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 MA(12) of the median of the distribution of PCE prices changes excluding food and energy items.