We have updated our estimates of (core) PCE price changes distributions to include the month of June 2022. In June, core PCE prices expanded 59bps, in line with our expectations and higher than May (35bps) and April (32bps).
The evidence of the distributions in PCE space is roughly in line with the one in CPI space. The June report shows a clear upward movement of the median, a decrease in the cross sectional dispersion, and a much thicker right shoulder of the distribution (of the last 3 months).
Overall, in our view today’s report confirms our prior: there is little in the data that suggests an imminent and sharp deceleration of consumers’ prices. (On this point, please note that the performance of the stock market in July will probably result in accelerating non-market prices in July-August)
All told, we continue to think it is way too early for the Fed staff (and FOMC) to pivot because there are no “clear and convincing” signs of deceleration in consumers’ price inflation.
Details
The fitted Kernel density (Figure 2) continues to show 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 shoulder of the distribution is (marginally) less thick, indicating that price contractions are less frequent.
If we look at the percentiles (Figure 3), in June we got a mixed picture with no clear direction. However, the median moved up to 5.0% (from 3.5%), the second highest reading since the beginning of Covid.
Percentiles details:
- The 5th pct is -22.8% (from -27.3%)
- The 10th pct is -15.3% (from -7.9%)
- The 25th pct is -0.1% (from -1.0%)
- The 50th pct is 5.0% (from 3.5%)
- The 75th pct is 11.9% (from 11.1%)
- The 90th pct is 20.9% (from 24.4%)
- The 95th pct is 33.4% (from 34.4%)
The Kernel of the last 3 months (Figure 4) moved up/right compared to 3-6 (and 6-9) months ago, indicating that price increases are more widespread.
Importantly, the median of the distribution (Figure 5 – left panel) moved up in June as mentioned. The reading of the median in June is the second highest since Covid. Consequently, the MA(12) of the median (Figure 5 – right panel) ticked up again in June to 3.7% (from 3.6%).
Implications for the Fed staff
In our pre-FOMC meeting package we assumed that the near-term forecast of the Fed staff was constructed with a 57bps MoM growth rate in June. Therefore, in our view today’s data should be no surprise for the Fed staff (although they are obviously very strong). For this reason, today’s data should have little effect on the Fed staff forecast, including on the “main” Phillips curve medium-term model forecast.
In our view, the Fed Board staff has not revised its near-term forecast following today’s report and assumes about 33bps MoM on average in the next 3 months for core PCE prices. In our view, the risks around this near-term forecast are well balanced.
Additional comment
At the July FOMC press conference, Powell said “we would be asking ourself… are we confident that inflation is on a path down to 2%? That’s really the question. And our policy stance will be set at a level ultimately at which we are confident that inflation is going to be moving down to 2%.”
Indeed, that is the relevant question. The answer, at the moment, is pretty clear: no, it is not.
For this reason, we continue to be skeptical that the Fed staff (and the FOMC) will pivot soon. The reason is that the models and the data (for the record, we saw the Q2 ECI report and we will circulate an email tomorrow on the subject) continue to suggest that without a significant help from the supply side, this inflation episode might prove more persistent than the Fed is anticipating.
The time to bet on the Fed pivot will come. But in our view, based on today’s inflation information set, there is little that suggests the Fed is about to pivot.
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).