We have updated our estimates of (core) PCE price changes distributions to include the month of May 2022. In May, core PCE prices expanded 35bps, a touch lower than expected and in line with April (33bps) and March (34bps).
The evidence of the distributions in PCE space is a bit different than in CPI space. The May report shows no clear movements in the percentiles of the distribution, a spike in the standard deviation and a median in line with the last 12 readings. Overall, in our view today’s report is a mixed bag for the Fed. The good news is that there are signs of stabilization of the distribution. The bad news is that the median remains very elevated (in line with average value of the past 12 months) and that the “softness” in today’s data is mainly driven by other than market-based items which tend to have little predictive power of future core PCE prices.
All told, still too early for the Fed to celebrate and/or to change tone. But at least it is not getting worse.
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 part of the distribution is (marginally) less thick, indicating that price contractions are less frequent.
If we look at the percentiles (Figure 3), in May we got a mixed picture with some percentiles moving higher and other moving lower. Importantly, the median ticked down to 3.5% (from 4.1%), but remains elevated and in line with the average of the last 12 months.
Percentiles details:
- The 5th pct is -27.3% (from -22.9%)
- The 10th pct is -11.1% (from -10.5%)
- The 25th pct is -1.0% (from -1.6%)
- The 50th pct is 3.5% (from 4.1%)
- The 75th pct is 10.6% (from 10.5%)
- The 90th pct is 22.5% (from 22.4%)
- The 95th pct is 33.2% (from 38.8%)
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.
Importantly, the median of the distribution (Figure 5 – left panel) ticked down in May as mentioned. The reading of the median in May is in line with its average of the last 12 months. Consequently, the MA(12) of the median (Figure 5 – right panel) is stable in May (at 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 39bps MoM growth rate in May. For this reason, in our view the (small) downward surprise in today’s data should have little effects 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 36bps 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
As Powell said last month, it is no time for nuances when interpreting inflation data. We agree with Powell and we think this approach will remain valid until we will see “clear and convincing” signs of inflation fading. For this reason, so far we have not commented the diverging gap between core CPI inflation and core PCE price inflation (we will in the future but only if and when it will matter in our view).
The last 3 PCE prices reports showed signs of stabilization but still no signs of deceleration. The median of the distribution remains elevated, as well as market-based core PCE prices (Figure 6, blue line). For this reason, we do not expect any change in communication from FOMC participants. Their commitment to bring down the distribution is “unconditional”, at this point even if the cost is a recession.
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. MoM of PCE prices excluding food and energy items
Note: the Figure shows the MoM (a.r.) of PCE prices market-based excluding food and energy items (blue line) and PCE prices other than market-based excluding food and energy items (yellow line).