0.3% Core Inflation, Uncertainty Remains High
We expect the seasonally adjusted month-over-month (MoM) core CPI to print at 0.3% (26bps) in March, with headline CPI projected at 0.1% (13bps). Risks are balanced (possibly to the upside, given tariffs), and uncertainty remains elevated. That said, our March MoM forecast is only slightly lower than our estimate at the time of the February CPI release (2bps lower), and we expect tariffs to start showing in the CPI reports from next month.
Taking a broader view, underlying challenges persist, even net of tariffs: the distribution of price changes within core CPI remains misaligned with the inflation target, and the presence of fat tails highlights the heightened uncertainty.
Implications for the Fed: to us, the Fed is “On Hold”, no matter what we get in the March CPI, given the tariffs shock.
Our forecast
We expect headline and core CPI to increase by 13 basis points and 26 basis points, respectively, in March, with non-seasonally adjusted (NSA) levels projected at 320.369 and 326.749. Based on our forecast, year-over-year (YoY) headline and core CPI are expected to print at 2.6% and 3.0%, respectively. Figure 1 provides a sectoral breakdown of our seasonally adjusted MoM forecast, with core goods and core services anticipated to rise by 17 basis points and 32 basis points, respectively.
As always, we refrain from making sectoral decomposition comments, as our focus remains on the ex-post distribution of price changes. Table 1 outlines our real-time MoM forecast errors: over the past six months, our core CPI forecast—our primary focus—has been very accurate, with a standard error of 3 basis points and a standard deviation of 7 basis points. That said, the mean of our forecast error is slightly above zero, indicating some upside risks to our MoM projection.
Figure 1. MoM sa CPI forecast – details
Table 1. Recent real-time Underlying Inflation MoM (sa) CPI forecast errors
The big picture
Taking a broader view -net of tariffs(!)- the overall outlook remains largely unchanged. As shown in Figure 2, reaching the inflation target will require additional disinflation from the labor market, either through a lower vacancy rate or a higher unemployment rate. Given current conditions, and again net of tariffs, core CPI seems more likely to stabilize around 3% rather than move toward 2%.
Figure 2. Core CPI Phillips curves
Using unemployment rate minus vacancy rate
Using jobs opening rate
Implications for the “main” model
We generally put here the medium-term model-based forecast. Given this environment, we defer the reader to our ad-hoc note here.