A solid month. We see the November CPI report on the solid side in core space. We expect the MoM (sa) of core CPI at 0.3% (34bps) and the MoM (sa) of headline CPI at 0.1% (8bps). Risks are well balanced. We see the YoY of core CPI (PCE) at 4.0% (3.4%) in December. The November CPI report is unlikely to make a difference for the FOMC and solve the puzzle of whether (and when) the US economy can reach target.
For this reason, as we wrote in the pre-FOMC meeting package, it is very hard to see the new dots validating the number of cuts in 2024 currently priced. If anything, the evidence continues to favor a less dovish Fed.
Our forecast
We expect headline and core CPI to expand 8bps and 34bps in November, respectively (NSA levels 307.044 and 311.805, 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 22bps and 40bps, 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, the std error and std deviation of our core CPI forecast (our main focus) are 4bps and 10bps, respectively. Our MoM forecast remains, on net, unbiased.
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 (latest one is here) is still not consistent with target. As Figure 2 shows, returning to target requires additional disinflation from the labor market of about 1.5pp (either from the vacancy rate of 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
Implications for the “main” model
Unchanged. We have recently circulated our “Pre-December 2023 FOMC Meeting Package” (here, slides here), therefore we keep it short. Conditional on our MoM forecast for November, the “main” model medium-term forecast would be unchanged. The latest model-based forecast of core PCE price inflation is at 3.5% in 2023, 2.5% in 2024, 2.4% in 2025, and 2.4% in 2026. The forecast remains above the Fed target.
Figure 3. Latest forecast of our “main” model for core PCE price inflation (YoY).
Conclusion
Unlikely to make a difference for the FOMC. Unless we get a large surprise, the outcome of the December FOMC is already written. Overall, we got some good news recently but lots of question marks remain and going back to target will require time. As such, we expect a prudent SEP.