We have updated the Pre March 2022 Meeting Package following the data releases of the last week (Productivity and Costs, CPI, Atlanta Fed wage tracker, energy and dollar futures). Please, find below the updated models outputs.
(As a reminder: the Pre March 2022 FOMC Meeting package is here)
To keep in mind
Two main updates: (i) our “main” Phillips curve model has revised up its forecast (to 4.1% in 2022) due to higher than expected incoming data, and (ii) our common wage model has revised up its Q1 estimate.
Overall, the information received in the last week confirm our prior: it appears possible that the US economy is already in some initial form of wage-price spiral.
“Main” Phillips curve model
The incoming data in the last week have been a bit stronger stronger than expected as the (small) upward surprise from CPI and the upward movement of energy futures more than offset lower expected import prices. Consequently, our “main” Phillips curve model has revised up its forecast. The model now expects core PCE price inflation (Q4/Q4) at 4.1% in 2022, 3.2% in 2023, and 2.9% in 2024.
Inflation forecast (YoY of core PCE, %) from "main" model – latest run
A. C.I. calculated from parameters distributions
Note: the confidence intervals (C.I.) are estimated using 100,000 draws from the estimated parameters distributions to simulate the path of core PCE price inflation going forward.
First quarter of forecast: 2022:Q2.
B. C.I. calculated using quasi-out-of-sample methods
Note: the confidence intervals (C.I.) are estimated using quasi-out-of-sample methods (estimate the model over a sub-sample, forecast, and calculate the root mean squared forecast errors).
First quarter of forecast: 2022:Q2.
Common Wage model
The information received on nominal wage growth in the last week have been strong. The Atlanta Fed wage tracker increased to 5.8% in February, the highest value since the beginning of the series. Our mixed-frequency dynamic factor model has reached 4.6% in Q1. The model suggests that nominal wage growth is now comparable to 1980s. In our view, at these levels it appears possible that the US economy is already in some initial form of wage-price spiral.
Common Factor across measures of wages and total compensation
Note: the Figure shows four measures of wages and total compensation, as well as the estimated common factor from our Dynamic Factor Model. ECI stands for “Employment Cost Index, Total Compensation, Private Industry, All Workers, SA”. AHE stands for “Average Hourly Earnings, All Employees, Total Private, SA”. CPH stands for “Nonfarm Business, Hourly Compensation, SA”. AFWT stands for “Atlanta Fed Measure of Median Nominal Wage Growth, Unweighted Overall, 3 Month Moving Average”. The four measures of wages and total compensation are shown at quarterly frequency in YoY growth rates. The common factor is specified as an autoregressive process of order 4 and it is projected onto the ECI (the measure with the lowest standard deviation). By construction, the absolute level of the estimated common factor cannot be interpreted because the four series are normalized at the beginning of estimation given their different means. Instead, the level of the common factor can be compared to its own history. Latest observation refers to 2022:Q1.