0.3 Core, Big Picture Unchanged. We expect the MoM (sa) of core CPI at 0.3% (26bps) and the MoM (sa) of headline CPI at 0.4% (35bps) in December. We perceive the risks to be balanced. This month, our MoM forecast has not materially changed compared to the time of the previous (November) CPI report.
Zooming out, 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 unrevised and remains above target at the end of the forecast horizon. In a nutshell: the Fed cut, inflation will remain above target.
Note: our machine learning model (not introduced yet) is forecasting 28bps for core (MoM) in December.
Our forecast
We expect headline and core CPI to expand 35bps and 26bps in December, respectively (NSA levels 315.557 and 322.148, 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 19bps and 30bps, 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) have been very competitive: 3bps and 8bps, respectively.
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. 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 current environment seems more compatible with core CPI remaining closer to 3% than 2%.
Figure 2. Core CPI Phillips curves
Using unemployment rate minus vacancy rate
Using jobs opening rate
The NSA level
Not consistent with target. Figure 3 shows the cumulative NSA level by year of core CPI. In our model-based bottom-up approach, the YoY of core CPI (PCE) is at 3.3% (2.9%) in December 2024.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged. Conditional on our MoM forecast for core CPI, the medium-term model for core PCE price inflation is unrevised. As a reminder, we are working under the assumption that core PCE prices will grow 2.6% QoQ (saar) in Q4. The current (Q4/Q4) model forecast is: 2.8% in 2024, 2.4% in 2025, 2.4% in 2026, and 2.4% in 2027.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
