Nailed it! Strong, More to Come
Exactly As Expected, Once Again. The July Consumer Price Index (CPI) release was exactly as expected by us: 32bps MoM for core CPI, and 20bps for headline CPI. The miss is tiny: 1bps for core CPI.
CPI/PCE Translation: Based on the latest CPI data, we estimate that core PCE will print at 0.26% MoM in July. As for headline, we expect 0.18% MoM translation. (See here for details). (Note: please, take today’s tranlsation with a grain of salt as it seems there are some gaps in items from the BLS. We are still working with the data and investingating it)
Reaction to the incoming data. Our near-term forecast is unrevised. We expect the August core CPI print at 33bps (MoM sa) and the YoY at 3.1% in December 2025 with upside risks (see NSA by year here). That said, this estimate should be regarded as more tentative than usual, given the rapidly evolving nature of both economic data and policy developments.
Models Insights: Risks Remain to the Upside. Our modeling framework signal substantial uncertainty and risks for strong prints ahead. Tail risks remain pronounced on both ends of the distribution with the median which has moved above 4% (ar). Also, the Common Inflation (CI) model indicates a very strong commmon component (see Figure 3 below). In other words, according to the CI model, it is likely to have other very solid MoM readings in the near-term going forward. Concurrently, our medium-term “main” model is unrevised compared to the preview and remains above the SEP.
General comment and conclusion. Today’s inflation print was somewhat better than expected beneath the surface, primarily due to smaller-than-anticipated tariff-related effects. However, this also suggests two important implications: (i) there may be additional tariff-related pass-through in the coming months, and (ii) even excluding these effects, inflation remains well above the Federal Reserve’s target (core services ex housing came in at 5.9% ar MoM with its YoY re-accelerating above 3%..). Taken together, we continue to find the prospect of a rate cut in September difficult to reconcile with current conditions (July was the 52nd consecutive month with inflation above target.. and it is re-accelerating), unless one has in mind an upcoming recession.
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 similar to last month and remains very different than pre-Covid (see ridge plot). The median (Figure 2) moved up again. As shown in Figure 1, the overall picture remains unchanged: the distribution continues to differ from the pre-Covid pattern, with little progress over the past nine months.
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 idiosyncratic shocks, the common component is very high. 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 34bps, the second highest reading since March 2023, while the idiosyncratic shock was small negative (-2bps). The 3m/3m of the “common” component (Figure 4) stands at 3.3%. Overall, the CI model indicates a strong common component (in acceleration and above 3%), pointing to strong MoM readings ahead.
An Excel file containing the results shown in Figure 3 and 4 can be downloaded here.
Figure 3. Contributions to MoM changes of CPI excluding food and energy items (CI 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 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 model.
Implications for the medium-term forecast of core PCE price inflation
The medium-term is unrevised. This is the first time we put Q3 in sample. Compared to the run at the time of the preview, the medium-term “main” model forecast is largely unrevised, as the data came in as expected.
The model’s latest Q4/Q4 forecasts are as follows: 3.3% in 2025, 3.25% in 2026, and 2.8% in 2027. This forecast remains above the latest SEP.
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).