SUMMARY
The May CPI release came in broadly in line with our expectations. The surprise was small for headline CPI (5 bps) and effectively zero for core CPI.
Over the past six months, our forecasting performance has been particularly strong. For headline CPI, our forecasts have delivered a standard error of just 1 bp and a standard deviation of 3 bps. For core CPI, the corresponding figures are 3 bps and 7 bps, respectively.
More broadly, we remain skeptical of the prevailing narrative that recent data provide convincing evidence of a renewed disinflationary process. In particular, the Core CPI – NSA YTD chart shown below does not, in our view, support such a conclusion. The underlying inflation environment remains challenging and, from the Federal Reserve’s perspective, potentially problematic—especially when viewed through the lens of PCE inflation rather than CPI.
Reaction to the incoming data.
As the data came in broadly in line with our expectations, our initial reaction is to leave the near-term forecast unchanged. We continue to expect core CPI inflation to increase by 22 bps MoM next month, while headline CPI is projected to decline by 4 bps MoM. Looking further ahead, our baseline forecast for December 2026 remains unchanged. We expect the year-over-year rate of core CPI inflation at 3.1%, headline CPI inflation at 3.9%, core PCE inflation at 3.3%, and headline PCE inflation at 3.9%.
An Excel file containing the full set of forecasts and underlying assumptions is available upon request.
A PDF containing all relevant CPI charts has been posted. You can download it here.
As for the Fed: A hike is on the table. The point is whether the Fed will follow the data or politics. Our pre-FOMC meeting package coming soon!
CPI/PCE Translation:
EVIDENCE FROM THE MODELS
The models continue to point to a strong common inflation component, a distribution of price changes that remains inconsistent with inflation at target, and a medium-term forecast that stays above the Federal Reserve’s objective. Following today’s data, the medium-term outlook has been revised up modestly, particularly for core PCE inflation. Overall, the signal from the models remains unchanged: underlying inflationary pressures continue to appear persistent rather than transitory.
DISTRIBUTIONS
Despite some moderation in selected measures, the overall shape of the distribution continues to point to underlying inflationary pressures that remain elevated relative to a 2% inflation environment.
Figure 1a. Cumulative density function (and table stats) of core CPI cross-section price changes.
Figure 1b. Kernel of core CPI cross-section price changes.
Figure 1c. Median of core CPI cross-section price changes.
CI MODEL
Our Common Inflation (CI) model estimates that, once idiosyncratic shocks are stripped out, the underlying common component remains firm. This month, the model estimates that the common component increased by 14 bps—a bit below the average of recent months—while the idiosyncratic component contributed a positive 7 bps. The 3m/3m annualized rate of the common component currently stands at 3.1%. The signal we take from today’s release is therefore straightforward: the common component of inflation remains strong.
An Excel file containing the results of the CI model can be downloaded here.
Figure 2a. Contributions to MoM changes of CPI excluding food and energy items (CI model)
Figure 2b. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
IMPLICATIONS FOR MEDIUM-TERM MODEL-BASED PCE FORECAST
For headline PCE the model’s latest Q4/Q4 forecasts are as follows: 4.1% in 2026, 2.3% in 2027, and 1.85% in 2028.
For core PCE the model’s latest Q4/Q4 forecasts are as follows: 3.6% in 2026, 2.8% in 2027, and 2.4% in 2028.
Figure 3a. “Main” Phillips curve model forecast, headline PCE price inflation (YoY, %).
Figure 3b. “Main” Phillips curve model forecast, core PCE price inflation (YoY, %).
