0.3% Core Inflation, Uncertainty Remains High
We expect the seasonally adjusted month-over-month (MoM) core CPI to print at 0.3% (30bps) in February, with headline CPI projected at 0.3% (25bps). Risks are tilted to the upside, and uncertainty remains elevated. That said, our February MoM forecast is only slightly lower than our estimate at the time of the January CPI release (3bps lower).
Taking a broader view, underlying challenges persist: the distribution of price changes within core CPI remains misaligned with the inflation target, and the presence of fat tails highlights the heightened uncertainty. Our medium-term model continues to forecast inflation above target over the projection horizon.
Implications for the Fed
Unless there is a significant surprise, we do not expect this data to materially impact the FOMC’s policy stance. The Fed is likely to maintain its “hold” position, particularly given the ongoing risks from tariffs and evolving expectations.
Note: Our machine learning model (yet to be formally introduced) projects a month-over-month (MoM) core CPI increase of 35 basis points for February. Additionally, it forecasts year-over-year (YoY) core CPI at 3.7% in December 2025 (see YoY forecast here).
Our forecast
We expect headline and core CPI to increase by 25 basis points and 30 basis points, respectively, in February, with non-seasonally adjusted (NSA) levels projected at 319.231 and 325.557. Based on our forecast, year-over-year (YoY) headline and core CPI are expected to print at 2.8% and 3.2%, respectively. Figure 1 provides a sectoral breakdown of our seasonally adjusted MoM forecast, with core goods and core services anticipated to rise by 33 basis points and 30 basis points, respectively.
As always, we refrain from making sectoral decomposition comments, as our focus remains on the ex-post distribution of price changes. Table 1 outlines our real-time MoM forecast errors: over the past six months, our core CPI forecast—our primary focus—has been among the most accurate in the industry, with a standard error of 2 basis points and a standard deviation of 6 basis points. That said, the mean of our forecast error is slightly above zero, indicating some (albeit minor) upside risks to our MoM projection.
Figure 1. MoM sa CPI forecast – details
Table 1. Recent real-time Underlying Inflation MoM (sa) CPI forecast errors
The big picture
Taking a broader view, the overall outlook remains largely unchanged. As shown in Figure 2, reaching the inflation target will require additional disinflation from the labor market, either through a lower vacancy rate or a higher unemployment rate. Given current conditions, core CPI seems more likely to stabilize around 3% rather than move toward 2%.
Figure 2. Core CPI Phillips curves
Using unemployment rate minus vacancy rate
Using jobs opening rate
The NSA level
Not Aligned with Target
As illustrated in Figure 3, the cumulative non-seasonally adjusted (NSA) level of core CPI by year underscores the significant uncertainty surrounding the extent of re-pricing at the start of 2025. Despite this, we expect strong core CPI readings in Q1.
Looking ahead, our model-driven bottom-up approach projects year-over-year core CPI at 3.0% and core PCE at 2.7% by December 2025.
Note: We are still assessing the news on tariffs, as there is a significant chance that the tariffs on Mexico and Canada may not remain in effect for long.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged.
Given our MoM forecast for core CPI, our medium-term model for core PCE price inflation remains unchanged. The model’s latest Q4/Q4 forecasts are as follows: 2.8% in 2025, 2.6% in 2026, and 2.5% in 2027.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
