0.2 Core, Big Picture Unchanged. We expect the MoM (sa) of core CPI at 0.2% (21bps) and the MoM (sa) of headline CPI at 0.2% (21bps) in July. We perceive the risks to be skewed a bit to the upside.
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 still above target. Overall, we expect the July report to confirm the Fed thesis: the risk for cutting rates is now acceptable, even if in the end we might remain a bit above target.
Note: in the next paragraph please find a discussion about our MoM miss in June and how this might affect the July forecast.
Our forecast
We expect headline and core CPI to expand 21bps and 21bps in July, respectively (NSA levels 314.687 and 319.278, 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 1bps 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) are 5bps and 11bps, respectively.
Note on our June MoM miss. Last month, the models missed way more than usual. What happened? Most of the miss was due rents/OER. As explained in previous emails, the issue is that the models are run in SA space, therefore we need to translate their forecast in NSA space and check whether the NSA level is a reasonable forecast. For July, we do not see the same risk. Please, get in touch for more details.
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 is still not consistent with target and the thick tails imply high uncertainty. 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.
Figure 2. Core CPI Phillips curves
Using jobs opening rate
Using unemployment rate minus vacancy rate
The NSA level
Not consistent with target. Figure 3 shows the cumulative NSA level by year of core CPI. Conditional on our forecast for July, the NSA level seems to suggest a reading of the YoY around 3% at the end of this year. In our model-based bottom-up approach, the YoY of core CPI (PCE) is at 2.9% (2.7%) 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 CPI forecast, the “main” model forecast for core PCE would be a touch softer (the model will include Q3 for the first time). The (Q4/Q4) model forecast is: 2.9% in 2024, 2.5% in 2025, and 2.4% in 2026.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
