We have updated our estimates of (core) PCE price changes distributions to include the month of January 2022.
The evidence in PCE space is even more explicit than in CPI space. As already signaled on CPI day, the distribution shows a significant shift of the median, which in January reached 6.3% at annual rate. The on-going upward shift of the 25th-75th percentiles indicates a diffuse strengh of the data. As such, we continue to expect strong incoming data, at least in the near-term.
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 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 January the left tail was relatively stable but 50th, 75th, and 90th percentile moved up notably. Price dispersion (captured by the cross sectional standard deviation) was relatively low and stable (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 4.6% (MoM a.r.) in December to 6.3% (MoM a.r.) in January.
In details (MoM a.r.):
- The 5th pct is -29.2% (-24.6% in Dec)
- The 10th pct is -15.5% (-15.8% in Dec)
- The 25th pct is -1.8% (-1.6% in Dec)
- The 50th pct is 6.3% (4.6% in Dec)
- The 75th pct is 14.1% (9.5% in Dec)
- The 90th pct is 32.2% (21.2% in Dec)
- The 95th pct is 39.1% (39.1% in Dec)
The recent shift of the distribution is visible by looking at Figure 4, which plots the distribution of price changes in the last 3 months compared to the previous two quarters. In the last three months (black line in Figure 4) the distribution shows a lower left tail and a thicker right tail (especially in the 5%-15% range).
The on-going increase of the p50 is reflected in the MA(12) of the median (Figure 5) that increased to 3.4% in January (from 3.1% in December), the highest reading in the last 25 years (and a bit higher than our expectations after the CPI report).
Implications for the Fed staff
The Fed Board staff is typically not surprised by core PCE prices because the staff can largely 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 6.3% a.r.).
In our view the Fed staff has probably revised its near-term forecast up a touch for the next 3 months (from about 35bps per month to 38bps per month). In our view, the risks around this near-term forecast are balanced.
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.