We have updated our estimates of (core) PCE price changes distributions to include the month of November 2021.
The evidence in PCE space is similar to the one in CPI space. Nevertheless, today’s report shows an upward movement of the median and a thicker right tail than expected, primarily driven by non-market prices. Overall, bad news for the Fed staff in our view.
We now assign a 33% probability to a March 2022 hike, with upside risks depending on the incoming data in the next 3 months.
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 (Figure 3), in November we get a mixed bag: some percentiles moved upward while other moved downward, with the upward movement of the 95th pct influenced by large gains of non-market items (on this point, please note the spike in price dispersion (right panel in Figure 3).
Importantly, the median moved up from 3.87% in October to 3.97% in November.
In details:
- The 5th pct is -23.1% (from -21.6% in Oct)
- The 10th pct is -10.7% (-10.5% in Oct)
- The 25th pct is -0.5% (from -0.2% in Oct)
- The 50th pct is 4.0% (3.9% in Oct)
- The 75th pct is 12.1% (12.5% in Oct)
- The 90th pct is 27.2% (25.3% in Oct)
- The 95th pct is 44.8% (from 38.6% in Oct).
The increase of the p50 is reflected in the MA(12) of the median (Figure 5) that increased to 2.9% in November (from 2.7% in Oct, revised up from 2.5%), the highest reading in the last 25 years.
Implications for the Fed staff
The Fed Board staff is typically not surprised by the market-based portion of core PCE prices because the staff can anticipate the reading once it has CPI and PPI data in hand. However, in our view the staff cannot properly anticipate the non-market portion of the data. Therefore, today’s report is an upward surprise for the Fed staff. All evidence now points to significant upside risks around the Fed staff medium-term inflation forecast (as inferred from the November FOMC minutes).
We continue to think that core PCE price inflation will land above 2 percent (Q4/Q4) in 2022, unless the level of durable goods will start falling fast in the next few months. Not only, but in light of today’s data we think that talks over the possibility of start hiking in March will start soon. Today’s report has brought the YoY of core PCE price inflation to 4.7%, which implies that the Fed has very little room left to bring core inflation close to target within the next 12 months. (For the record: the SEP forecast of core PCE price inflation in 2021 was 3.7% at the September FOMC) At the moment, we assign a 33% probability of a rate hike in March (with upside risks if the next 3 core CPI reports will not moderate and fall below 0.3% MoM).
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 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.