A solid print. We see the March CPI report on the solid side in core space. We expect the MoM (sa) of core CPI at 0.3% (33bps) and the MoM (sa) of headline CPI at 0.3% (35bps).
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. In a nutshell: the CPI report is unlikely to bring clarity on the path of core inflation. If anything, we expect the report to confirm that achieving (and staying at) target is not obvious.
We expect the April FOMC to be a non-event. The Fed can just “hold” for now.
Our forecast
We expect headline and core CPI to expand 35bps and 33bps in March, respectively (NSA levels 312.303 and 317.030, 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 15bps and 42bps, 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, we are proud that the std error and std deviation of our core CPI forecast (our main focus) are 5bps and 11bps, respectively. Having said that, in the last few months, our forecast has been slightly biased to the downside (error mean: -2bps), therefore we have judgmentally adjusted up our March MoM forecast by 3-4bps.
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 (latest one is here) 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. The labor market is cooling off but it will take another few (several?) months to be consistent with target.
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 March, 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 is at 3.3% in December 2024.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged. Compared to last run, the model forecast is largely unchanged. The model forecast is: 3.0% (Q4/Q4) in 2024, 2.6% in 2025, and 2.6% in 2026. This forecast is a bit above the latest SEP at every horizon.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Wait and see. At this point, no matter what we get in the March CPI report, the outcome of the April FOMC seems on autopilot (“wait and see”). More importantly, the April CPI report is unlikely to bring any clarity for the path of core inflation. If anything, we expect the report to confirm that achieving (and staying at) target is not obvious at all.