0.3 Core, Big Picture Unchanged. We expect the MoM (sa) of core CPI at 0.3% (32bps) and the MoM (sa) of headline CPI at 0.3% (25bps) in October. We perceive the risks to be balanced.
Zooming out, 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 unrevised and remains above target at the end of the forecast horizon. In a nutshell: the Fed is cutting, inflation will remain above target.
Note: our machine learning model (not introduced yet) is forecasting 30bps for core (MoM) and 20bps for headline (MoM) in October.
Our forecast
We expect headline and core CPI to expand 25bps and 32bps in October, respectively (NSA levels 315.528 and 321.582, 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 31bps and 34bps, 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) have been very competitive: 4bps and 9bps, respectively.
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 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.
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 October, 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 (PCE) is at 3.3% (2.9%) in December 2024.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged. This is the first time we will put Q4 in sample. We are working under the assumption that core PCE prices will grow 2.7% QoQ saar in Q4. Conditional on this, the model forecast is unrevised, as our Q4 nowcast is in line with the model own forecast for Q4. The (Q4/Q4) model forecast is: 2.85% in 2024, 2.4% in 2025, 2.4% in 2026, and 2.35% in 2027.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
