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 a more frequent and larger than just the outliers at the end of the right tail. If we look at the percentiles (Figure 3), in October all percentiles shifted upward. Importantly, it should be noted the upward shift in recent months of the 25th–75th percentile (the green area), indicating that price increases are widespread.
For the record, in October:
- The 5th pct is -21.5% (from -30.1% in Sep)
- The 10th pct is -10.8% (-19.6% in Sep)
- The 25th pct is -1.0% (from -4.3% in Sep)
- The 50th pct is 3.9% (1.9% in Sep)
- The 75th pct is 12.4% (8.0% in Sep)
- The 90th pct is 25.3% (13.6% in Sep)
- The 95th pct is 38.6% (from 23.2% in Sep).
The shift of the distribution is reflected in the MA(12) of the median (Figure 5) that increased in October to 2.7% (from 2.5% in Sept), the highest reading in the last 25 years (if we exclude a couple of observations pre Great Recession).
Implications for the Fed staff
The Fed Board staff is typically not surprised by PCE price data because the staff can anticipate the reading once it has CPI and PPI data in hand. Therefore, today’s data do not materially change the outlook for the Fed staff. Nevertheless, the October CPI/PPI data have been a red flag for the staff and the FOMC. All evidence now points to significant upside risks around the Fed staff inflation forecast (which we continue to think it is still below 2 percent in 2022).
From our point of view, at this point it is hard to think that core PCE price inflation will land below 2 percent (Q4/Q4) in 2022, unless the level of durable goods will start falling fast in the next few months. Rather, the question is now whether core PCE price inflation will end up being moderately above 2 percent (in which case the Fed staff can in any case claim victory) or whether core inflation will be significantly higher (in which case the Fed will be behind the curve).
We continue to believe that core PCE price inflation will moderate significantly over the course of 2022 but we also think that in light of the incoming data the FOMC will progressively twist toward a much less dovish approach and faster tapering (possibly starting at the January meeting) because at this point the FOMC needs to buy a lot of optionality for mid ’22.