Broadly in line with expectations (ours). The December CPI report aligned closely with our projections. Core CPI came in slightly softer (23bps vs. our forecast of 26bps), while headline CPI was marginally stronger. Table 1 outlines our MoM forecast errors. Over the past six months, the standard error (2bps) and standard deviation (4bps) of our MoM core CPI forecasts (our focus) have been exceptionally competitive, possibly among the best in the industry.
Reaction to the incoming data: no change. We are still analyzing the data, but our initial response is to take no signal from this minor miss and maintain our near-term forecast unchanged. We project January core CPI at 35bps and anticipate the YoY of core CPI (PCE) to reach 3.1% (2.5%) by June 2025.
Translation CPI/PCE: our translation of today’s core CPI print is 18bps in core PCE space.
Evidence from our models: big picture unchanged. In CPI terms, the distribution of price changes remains markedly different from pre-Covid patterns. Notably, the distribution shows no progress over the past nine months, with a discernible rightward shift in the last three months. On a positive note, our CI model estimates that December recorded the lowest common component of the past 12 months. However, given the distribution dynamics, high volatility, and potential residual seasonality issues, we take no signal from this isolated development. Lastly, our “main” medium-term model is largely unchanged, with the forecast remaining above target.
To sum up: today’s report does not alter our outlook. We also expect the Fed to proceed with caution until there is greater clarity on distribution trends in Q1, which is critical for assessing the 2025 trajectory, as the bulk of repricing typically occurs in the year’s early months.
Table 1. Updated MoM (sa) UnderlyingInflation real-time forecast errors in the last 6 months.
A PDF containing all relevant CPI charts has been posted. You can download it here.
Evidence from the distributions
The distribution remains unfavorable and inconsistent with the target. This month, the distribution is still highly dispersed, similar to last month (see ridge plot). The median (Figure 2) ticked upward. As shown in Figure 1, the overall picture remains unchanged: the distribution continues to differ from the pre-Covid pattern, with little to no progress over the past nine months. In fact, the last three months show a noticeable shift to the right. For this reason, as noted in previous reports, we remain cautious about declaring victory or suggesting that 2% is within reach.
Figure 1. Kernel of CPI excluding food and energy items changes (MoM %, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 2. Median (core) CPI metrics
Note: the Figure shows the median (MoM %, a.r.) of the distribution of CPI prices changes excluding food and energy items (left panel) and the YoY (right panel).
Evidence from our CI-C model
Our CI model estimates that, excluding Covid-related and idiosyncratic shocks, the common component remains above target. Figure 3 illustrates the decomposition of the MoM core CPI into “common” and “idiosyncratic” components. This month, the model estimates that the common component increased by 15bps, while the idiosyncratic shock contributed positively (8bps).
The good news in today’s report is that in December, the common component expanded at its slowest pace in the past 12 months. However, due to the series’ volatility and potential residual seasonality issues, we are not drawing any conclusions at this time. The 3m/3m of the “common” component (Figure 4) stands at 2.8%. Overall, the CI model indicates that the “true” underlying pace of the data remains above target and close to 3%.
Figure 3. Contributions to MoM changes of CPI excluding food and energy items (CI-C model)
Note: the Figure shows the decomposition of the MoM percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI-C model, a 2-stage OLS-LASSO regression model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI-C model.
Implications for the medium-term forecast of core PCE price inflation
The medium-term forecast remains largely unchanged. Today’s data had minimal impact on the model forecast. If anything, the forecast is slightly lower than the previous run, as Q4 is marginally weaker than anticipated. The changes are primarily cosmetic. The (Q4/Q4) model forecast is as follows: 2.4% in 2025, 2.4% in 2026, and 2.3% in 2027.
Figure 5. “Main” Phillips curve model forecast, core PCE price inflation (YoY, %).
Note: the figure shows the latest run of our “main” Phillips curve model. The confidence intervals (C.I.) are estimated using quasi-out-of-sample methods (estimate the model over a sub-sample, forecast, and calculate the root mean squared forecast errors).