0.3 Core, Elevated Uncertainty
We anticipate that the seasonally adjusted month-over-month (MoM) core CPI will print 0.3% (33 basis points) in January, while headline CPI is expected to come in at 0.4% (35 basis points). Risks are skewed to the upside, and uncertainty remains exceptionally high—January is historically the most challenging month to forecast due to its pronounced volatility. That said, our MoM projection for January remains largely unchanged from the previous CPI release.
Stepping back, the underlying issues persist: the distribution of price changes within core CPI remains misaligned with the inflation target, and the presence of fat tails underscores heightened uncertainty. Our medium-term model, now incorporating Q1 for the first time, remains unchanged and continues to project inflation above target at the forecast horizon.
Implications for the Fed: Barring a significant surprise, we do not anticipate any meaningful impact on the FOMC’s policy stance. The Fed is likely to remain in a “hold” position.
Note: Our machine learning model (yet to be formally introduced) projects a month-over-month (MoM) core CPI increase of 28 basis points for January. Additionally, it forecasts year-over-year (YoY) core CPI at 3.0% in December 2025 (see YoY forecas here).
Our forecast
We expect headline and core CPI to rise by 35 basis points and 33 basis points, respectively, in January, with non-seasonally adjusted (NSA) levels at 317.629 and 323.667. Figure 1 provides a sectoral breakdown of our seasonally adjusted MoM forecast, with core goods and core services expected to increase by 25 basis points and 37 basis points, respectively.
As always, we refrain from commenting on sectoral decomposition, as we prioritize the ex-post distribution of price changes. Table 1 presents our real-time MoM forecast errors: over the past six months, the standard error and standard deviation of our core CPI forecast—our primary focus—have been among the most accurate in the industry, at 2 basis points and 4 basis points, 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 broader outlook remains largely unchanged. As Figure 2 illustrates, achieving the inflation target within the CPI framework will require further disinflation from the labor market, whether through a decline in the vacancy rate or an increase in the unemployment rate. Given current conditions, core CPI appears more likely to stabilize around 3% rather than converging toward 2%.
Figure 2. Core CPI Phillips curves
Using unemployment rate minus vacancy rate
Using jobs opening rate
The NSA level
Not Consistent with Target
As shown in Figure 3, the cumulative non-seasonally adjusted (NSA) level of core CPI by year highlights the significant uncertainty surrounding the magnitude of re-pricing at the start of 2025. Nonetheless, we anticipate robust core CPI figures in Q1.
Looking further ahead, our model-based bottom-up approach projects year-over-year core CPI at 3.1% and core PCE at 2.3% by June 2025.
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. This marks the first instance in which we incorporate Q1 into the sample, and our nowcast (2.6% QoQ SAAR) aligns closely with the model’s own projection for the current quarter. The model’s latest Q4/Q4 forecasts are as follows: 2.4% in 2025, 2.3% in 2026, and 2.3% in 2027.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
