Reminder: Riccardo Trezzi will be in Washington DC (October 3rd – 4th) and New York (October 6th – 7th – 8th). Please, get in touch to schedule a meeting or a coffee.
Another 0.3% Core Inflation.
We project the seasonally adjusted month-over-month (MoM) core Consumer Price Index (CPI) for August to increase by 0.3% (28 basis points), with headline CPI expected to rise by 0.3% (32 basis points). The balance of risks remains tilted to the upside. As in the last 2 months, we have made a discretionary downward adjustment of approximately 3-4 basis points to our MoM core CPI forecast (by doing so our MoM was spot on in the last two months).
From a broader perspective, fundamental inflationary pressures remain elevated, even after adjusting for tariff-related effects. The distribution of price changes within the core CPI continues to deviate from levels consistent with the inflation target, and the persistence of fat-tailed distributions underscores prevailing uncertainty in the inflation outlook.
Our medium-term baseline model remains largely unchanged, just a touch lower, see below for details.
The FOMC has decided to cut rates in September against the model-based evidence. To us, the only certainty after September is uncertainty.
Our machine-learning model. We have not introduced our machine-learning model yet (documentation is here). However, we have been monitoring this model for months and the out-of-sample performance is accurate. For the record, the model (which includes more than 100 variables) is forecasting 31bps MoM sa for core CPI in August. The model estimates 23% probability of having a 0.2% MoM in core CPI, 42% probablity of having a 0.3% in core CPI, and 35% probability of having a 0.4% MoM in core CPI. The cumulative densitive function of the MoM in August can be seen here.
Our forecast
We expect headline and core CPI to increase by 32 basis points and 28 basis points, respectively, in August, with non-seasonally adjusted (NSA) levels projected at 323.880 and 329.812. Based on our forecast, year-over-year (YoY) headline and core CPI are expected to print at 2.9% and 3.0%, respectively. Table 1 provides a sectoral breakdown of our seasonally adjusted MoM forecast, with core goods and core services anticipated to rise by 24 basis points and 31 basis points, respectively. Given our MoM forecast for core CPI we expect core PCE prices to grow 27bps MoM in August.
As always, we refrain from making sectoral decomposition comments, as our focus remains on the ex-post distribution of price changes. Table 2 outlines our real-time MoM forecast errors: over the past six months, our core CPI forecast—our primary focus—has been very competitive, with a standard error of 3 basis points and a standard deviation of 8 basis points. In the last 2 months, we missed by 1bps, possibly the best forecast in the street.
Table 1. MoM sa CPI forecast – details
Table 2. Recent real-time Underlying Inflation MoM (sa) CPI forecast errors
Implications for the “main” model
Unchanged.
We are working under the nowcast of 3.2% QoQ saar in Q3. Given this nowcast, the medium-term model forecast for core PCE price inflation is just a touch lower than the previous run. In any case, the downward revision is small (a few basis points and 1 tenth to rounding). The model’s latest Q4/Q4 forecasts are as follows: 3.2% in 2025, 3.2% in 2026, and 2.8% in 2027.
Figure 1. Latest forecast of our “main” model for core PCE price inflation (YoY).
