Another print inconsistent with target. We see the April CPI report on the solid side in core space. We expect the MoM (sa) of core CPI at 0.3% (30bps) and the MoM (sa) of headline CPI at 0.4% (39bps). This forecast is a bit above the one suggested by our models, but given our recent misses (see Table 1), we judgmentally boosted our MoM forecast for April. We explain the details below.
The issues remain the same: the distribution of price changes in core CPI space is still not consistent with target and the thick tails signal high uncertainty. The medium-term model is still above target, and revised up marginally the forecast with Q2 in-sample. In a nutshell: the CPI report is unlikely to bring clarity on the path of core inflation. If anything, we expect the report to confirm that achieving (and staying at) target is not obvious.
All told, unless we get big surprises the April CPI report should not modify the big picture for the Fed: pi* is estimated at 2.6% and the probability of a hike is low at the moment. If anything, “for longer” shall be.
Our forecast
We expect headline and core CPI to expand 39bps and 30bps in April, respectively (NSA levels 313.863 and 318.066, respectively). Figure 1 below shows the sectoral breakdown of our MoM (sa) forecast. We expect the MoM (sa) of core goods and core services to be 10bps and 39bps, respectively. As usual, we do not comment on the sectoral breakdown because we give much more importance to the ex-post distribution of price changes. Table 1 shows our real-time MoM forecast errors: in the last 6 months, we are proud that the std error and std deviation of our core CPI forecast (our main focus) are 5bps and 11bps, respectively. Having said that, in the last few months, our forecast has been slightly biased to the downside and we missed 4 months in a row in the same direction. For this reason, we judgmentally raised our April forecast by 4bps, distributed across categories (withouth this adjustment our forecast for April would have been 26bps for core and 35bps for headline).
Figure 1. MoM sa CPI forecast – details
Table 1. Recent real-time Underlying Inflation MoM (sa) CPI forecast errors
The big picture
Zooming out, the big picture is largely unchanged. The US economy is gently disinflating. Right now, the distribution of price changes in CPI space (latest one is here) is still not consistent with target and the thick tails imply high uncertainty. As Figure 2 shows, returning to target (in CPI space) requires additional disinflation from the labor market either from the vacancy rate or the unemployment rate. The labor market is cooling off but it will take another few (several?) months to be consistent with target.
Figure 2. Core CPI Phillips curves
Using jobs opening rate
Using unemployment rate minus vacancy rate
The NSA level
Not consistent with target. Figure 3 shows the cumulative NSA level by year of core CPI. Conditional on our forecast for April, the NSA level seems to suggest a reading of the YoY around 3%+ at the end of this year. In our model-based bottom-up approach, the YoY of core CPI is at 3.4% in December 2024.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
A bit higher. This is the first time we include Q2 in-sample based on our nowcast (3.3% QoQ saar). Given this nowcast, the model forecast is marginally higher than the previous run, as the Q2 data are a bit stronger than the model own forecast. The current model forecast is: 3.3% (Q4/Q4) in 2024, 2.8% in 2025, and 2.7% in 2026. This forecast is above the latest SEP at every horizon.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Wait and see. Unless we get big surprises, the April CPI report should not modify the big picture for the Fed: pi* is estimated at 2.6% and the probability of a hike is low at the moment. If anything, “for longer” shall be.