0.3% Core Inflation.
We project the seasonally adjusted month-over-month (MoM) core Consumer Price Index (CPI) for July to increase by 0.3% (31 basis points), with headline CPI expected to rise by 0.2% (22 basis points). The balance of risks remains tilted to the upside. As last month, we have made a discretionary downward adjustment of approximately 3-4 basis points to our MoM core CPI forecast. This revision reflects a pattern of overestimation in recent months, attributable to the anticipated but unrealized impact of tariffs.
From a broader perspective, fundamental inflationary pressures remain elevated, even after adjusting for tariff-related effects. The distribution of price changes within the core CPI continues to deviate from levels consistent with the inflation target, and the persistence of fat-tailed distributions underscores prevailing uncertainty in the inflation outlook.
Our medium-term baseline model remains largely unchanged, just a touch lower, see below for details.
We remain unsure the Fed can cut in September if we get a 0.3% MoM in core CPI.
Our machine-learning model. We have not introduced our machine-learning model yet (documentation is here). However, we have been monitoring this model for months and the out-of-sample performance is accurate. For the record, the model (which includes more than 100 variables) is forecasting 30bps MoM sa for core CPI in July. The model estimates 8% probability of having a 0.2% MoM in core CPI, 66% probablity of having a 0.3% in core CPI, and 26% probability of having a 0.4% MoM in core CPI. The cumulative densitive function of the MoM in July can be seen here.
Our forecast
We expect headline and core CPI to increase by 22 basis points and 31 basis points, respectively, in July, with non-seasonally adjusted (NSA) levels projected at 323.175 and 328.860. Based on our forecast, year-over-year (YoY) headline and core CPI are expected to print at 2.8% and 3.0%, respectively. Table 1 provides a sectoral breakdown of our seasonally adjusted MoM forecast, with core goods and core services anticipated to rise by 40 basis points and 27 basis points, respectively. Given our MoM forecast for core CPI we expect core PCE prices to grow 32bps MoM in July.
As always, we refrain from making sectoral decomposition comments, as our focus remains on the ex-post distribution of price changes. Table 2 outlines our real-time MoM forecast errors: over the past six months, our core CPI forecast—our primary focus—has been competitive, with a standard error of 4 basis points and a standard deviation of 11 basis points. That said, the mean of our forecast error is above zero, indicating some upside risks to our MoM projection.
Table 1. MoM sa CPI forecast – details
Table 2. Recent real-time Underlying Inflation MoM (sa) CPI forecast errors
Implications for the “main” model
A Touch Lower.
This is the first time we put Q3 in sample. We are working under the (conservative) nowcast of 3.3% QoQ saar in Q3. Given this nowcast, the medium-term model forecast for core PCE price inflation is just a touch lower than the previous run, as the Q3 nowcast is marginally lower than the model own forecast. In any case, the downward revision is small (1 tenth to rounding). The model’s latest Q4/Q4 forecasts are as follows: 3.3% in 2025, 3.25% in 2026, and 2.8% in 2027.
Figure 1. Latest forecast of our “main” model for core PCE price inflation (YoY).
