A solid month. We see the December CPI report on the solid side in core space. We expect the MoM (sa) of core CPI at 0.3% (29bps) and the MoM (sa) of headline CPI at 0.3% (25bps). Risks are well balanced. The December CPI report is unlikely to make a difference for the FOMC and solve the puzzle of whether (and when) the US economy can reach target. For now, we see the Fed staff and the FOMC in “wait and see” mode.
Our forecast
We expect headline and core CPI to expand 25bps and 29bps in December, respectively (NSA levels 306.598 and 311.793, 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 38bps, 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, the std error and std deviation of our core CPI forecast (our main focus) are 4bps and 10bps, respectively.
Note: In December our “true” MoM (sa) forecast would be 4-5bps higher than the one shown in Figure 1. However, in the last two months our core forecast has been a bit higher than published CPI (the upward bias over the last 6 months is 2bps per month – see Table 1). Therefore, we decided to judgmentally lower our MoM in December by 4-5bps.
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 (latest one is here) is still not consistent with target. As Figure 2 shows, returning to target requires additional disinflation from the labor market of about 1pp (either from the vacancy rate of the unemployment rate). The labor market is cooling off but it will take another few months to be consistent with target.
Figure 2. Core CPI Phillips curves
Using jobs opening rate
Using unemployment rate minus vacancy rate
Implications for the “main” model
Unchanged. Conditional on our forecast, the “main” model medium-term forecast is little changed compared to the previous run (here). The latest model-based forecast of core PCE price inflation is at 2.2% in 2024, 2.2% in 2025, and 2.2% in 2026 (see Figure 3 below). The forecast is a bit below the latest SEP in 2024 and a bit above the SEP at the end of the forecasting horizon.
Figure 3. Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Wait and see. In our view and estimate, the Fed staff and the FOMC are on “wait and see” mode. The data are cooperating and validating the SEP/Tealbook forecasts. January FOMC seems on autopilot; after that, all options are on the table for the March round.