Some further improvements. As anticipated in previous notes, we see the June CPI report on the solid side. We expect the MoM of core CPI at 0.3% (25bps) with well balanced risks. While the Fed might be hiking in July by “inertia”, our forecast for the next 2-3 months continues to be quite positive: we currently see the MoM of core CPI at 20bps in July and 23bps in August. These readings are expected to be driven (mainly) by a drop in used car prices and some further improvements in other items. If our forecast is correct, at the time of the September meeting the FOMC would see the latest 3 core CPI reports in the 0.2%/0.3% range, as opposed to the 0.4%/0.5% at the time of the June meeting.
(Note: please note that we do expect some rebound in Q4 – get in touch for details)
Back in March we saw a rationale for the Fed to surprise again on the hawkish side at least until the June meeting despite financial stability concerns. The timing of the July meeting is a bit unfortunate. After that, using the same logic as in March (just the opposite way) it is hard for us to see another hike in September.
Our forecast
We expect headline and core CPI to expand 26bps and 25bps in June, respectively (NSA levels 305.392 and 309.258, respectively). Figure 1 below shows the sectoral breakdown of our MoM forecast. We expect core goods and core services to expand 11bps and 33bps, respectively. Conditional on our forecast, core inflation would show some further progresses of disinflation. As usual, we do not comment on the sectoral breakdown because we give much more importance to the ex-post distribution of price changes (latest one is here). Figure 2 shows our real-time MoM forecast errors: in the last 6 months, we are proud that the std error and std deviation of our core forecast (which is our main focus) are 3bps and 8bps, respectively.
Figure 1. MoM CPI forecast – details
Figure 2. Recent real-time Underlying Inflation MoM forecast errors
Implications for the “main” model
Implications for the medium-term model-based forecast of core PCE price inflation. Conditional on our MoM forecast, the implications for the medium-term model of core PCE would be trivial because we have already discounted some softness when we have updated the model following the latest PCE report (see here). In the latest run, the Q4/Q4 forecast is: 3.9% in 2023, 3.2% in 2024, and 2.9% in 2025. The model continues to suggest that going back to target will take time and monetary policy will need to remain restrictive. But at least, now the confidence bands include the target at the end of the medium-term.
Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Two additional hikes? As mentioned, while the Fed might be hiking “by inertia” in July, can we be sure of another hike in September? At this point, the only way to get a second hike in our estimates is an upward surprise (which is always possible but not likely in our view). Otherwise, the Fed can be patient and give the data a chance.