The BLS has released new CPI seasonal factors. The new profile of core CPI (seasonally adjusted) is much less “friendly” than the previous vintage, as it shows very little deceleration. We discuss the implications for the Fed staff and the FOMC.
The facts
The new seasonal factors result in less deceleration of core CPI. The BLS has released the CPI seasonal factors which will be included in the upcoming January report next Tuesday. Figure 1 shows the MoM (%, ar) of core CPI using the previous vintage (the gray line, old seasonal factors) and the current vintage (the blue line, new seasonal factors). The last point in Figure 1 shows our forecast for January (36bps or 4.4% at annual rate). Table 1 shows the MoM of both series in the last three months (Oct-Nov-Dec) and their averages. The main takeaway is that the new profile of core CPI is way less “friendly” (it shows much less deceleration) than the previous vintage in recent months. Indeed, the average of the MoM in Oct-Nov-Dec under the previous vintage is 3.1% (line 1 in Table 1), while under the new vintage is more than 1 percentage point higher (4.3%) with December running at almost 5% at annual rate.
Figure 1. MoM of Core CPI seasonally adjusted at annual rate (%)
Table 1. MoM of Core CPI seasonally adjusted at annual rate (%)
Implications for the Fed staff
Little to celebrate for the Fed staff, although the new CPI profile confirms the staff forecast. By definition, the seasonal factors sum up to zero over the course of 12 months. Therefore, the net effect of the new seasonals on the YoY is zero. Having said so, the new profile of core CPI is less friendly than the previous vintage in recent months and shows little deceleration. In this sense, the new vintage is in line with the profile of core PCE prices market-based from which, in our experience, the Fed staff takes lots of signal (Figure 2). The profile of core PCE price inflation will be unaffected by the new BLS seasonals, as the PCE seasonals are updated during the BEA annual revision (therefore, in our experience there are no direct implications for the staff medium-term PCE models).
Figure 2. MoM of Core PCE prices (%, ar)
All told, in our view and estimates, core CPI and core PCE prices they now both confirm the Fed staff forecast and invite the FOMC to prudence. There is no need to push for a higher terminal rate (FRB-US estimates are still a bit above 5%) but because the data are still on the 30-yard line, there is no room for celebration. Higher for longer still the baseline.
(We have seen the large drop in long-term inflation expectations (SPF) today. We are assessing the implications. The drop is likely to result in a lower estimate of pi* and therefore in a slightly lower medium-term judgmental forecast)