The danger zone. We see the January CPI report on the soft side in core space. We expect the MoM (sa) of core CPI at 0.2% (23bps) and the MoM (sa) of headline CPI also at 0.2% (15bps). Risks are to the upside.
We invite the reader to be extra careful this month. There is a huge uncertainty around the forecast due to the “January repricing effect”, as well as revisions to seasonal factors coming this week. For this reason, we defer the discussion about the Fed once we will have the January CPI report.
Our forecast
We expect headline and core CPI to expand 15bps and 23bps in January, respectively (NSA levels 307.988 and 313.161, 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 -9bps 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, we are proud that the std error and std deviation of our core CPI forecast (our main focus) are 4bps and 9bps, 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. The US economy is gently disinflating. Right now, the distribution of price changes in CPI space (latest one is here) is still not consistent with target, although it seems to be in PCE space. As Figure 2 shows, returning to target (in CPI space) requires additional disinflation from the labor market 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
A word of caution
Be careful, it is January. As we mentioned in our January HICP preview (here), the month of January is very hard to forecast. This applies also to the US. Not only, but in a few days we will get revised seasonal factors which are very hard to predict. In any case, Figure 3 shows the cumulative NSA core CPI level by year. Conditional on our forecast, the January NSA print would be the lowest in recent history, including pre-Covid. The reason is, of course, the large drop in used cars we are projecting. All of this to say that: (i) never like this month we feel that uncertainty is very high, and (ii) the risks around our forecast are probably to the upside given the possible repricing.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged. This is the first time we include Q1 in-sample. Conditional on our forecast and a Q1 nowcast of 2.2% (QoQ saar) for core PCE, the “main” model medium-term forecast is little changed compared to the previous run. The reason is the model forecast of Q1 (stopping the estimation in Q4) was 2.1% QoQ saar, therefore the inclusion of the new quarter does not trigger any significant revision.
The latest model-based forecast of core PCE price inflation is at 2.1% in 2024, 2.2% in 2025, and 2.2% in 2026 (see Figure 4 below). The forecast is a bit below the latest SEP, except in 2026.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Wait and see. Almost impossible to say anything about the Fed staff and the FOMC without the actual report this month. For this reason, we defer the discussion.