Models Are Saying Acceleration Might Be Coming Soon
Exactly As Expected. The June Consumer Price Index (CPI) release was exactly as expected by us: 23bps MoM for core CPI, as in our preview. Headline CPI was a touch stronger.
CPI/PCE Translation: Based on the latest CPI data, we estimate that core PCE will print at 0.28% MoM in June. As for headline, we expect 0.31% MoM translation. (See here for details).
Reaction to the incoming data. Our near-term forecast is unrevised. We expect the July 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: Big Risks. Our modeling framework signal substantial uncertainty and big risks for an acceleration. Tail risks remain pronounced on both ends of the distribution with the median close to 4% (ar). Also, the Common Inflation (CI) model indicates the biggest commmon component since March 2023 masked by a string of negative idiosyncratic shocks (see Figure 3 below). In other words, according to the CI model, it is likely to have an acceleration of the MoM in the near-term going forward. Concurrently, our medium-term “main” model is unrevised and remains above the SEP.
Conclusion: A Landscape of Extreme Uncertainty, Risks to the Upside. Today we got a “soft” reading but the models are flagging risks everywhere. In other words, this environment offers little clarity for forward policy guidance. As a result, we continue to believe the Federal Reserve will remain in a holding pattern for the time being.
In a nutshell: All it would take is one “unlucky” month for the Federal Reserve—meaning a month where idiosyncratic disinflationary shocks are absent—for us to see very large month-over-month increases in core CPI (as high as 5% ar). And we believe that scenario might not be far off. Ultimately, it appears that the impact of tariffs is beginning to show in the data and is likely to persist throughout the summer. If this assessment proves accurate, we would subjectively assign a near-zero probability to the Fed cutting rates in September—unless there is an extremely weak non-farm payroll (NFP) report, akin to an economic “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 more dispersed than last month and remains very different than pre-Covid (see ridge plot). The median (Figure 2) moved up significantly. 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. We will monitor closely the distribution to assess the impact of the upcoming tariffs.
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 40bps, the highest reading since March 2023 (!), while the idiosyncratic shock was negative (-17bps). The 3m/3m of the “common” component (Figure 4) stands at 2.8%. Overall, the CI model indicates a strong common component, masked by a string of 5 negative idiosyncratic shocks in the last 5 months. We invite everyone to be extra careful, as it is likely to have a strong core CPI MoM reading in near-term going forward.
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. Compared to the run at the time of the preview, the medium-term “main” model forecast is unrevised, as the data came in as expected.
The model’s latest Q4/Q4 forecasts are as follows: 3.4% in 2025, 3.4% in 2026, and 2.9% 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).