As expected. The October CPI report was as expected. Headline CPI came in exactly in line with our forecast, and core was a touch softer (rents and OER came in as expected). Table 1 shows our MoM forecast errors. In the last 6 months, the std error (4bps) and the std dev (9bps) of our MoM forecast for core CPI (our focus) remains competitive and unchanged from last month. (in the last 3 months, our headline forecast has been probably the best in the street, as the absolute mean error is 3bps)
Reaction to the incoming data: no revision to near-term. We are still digesting the data but our first reaction is to make no changes to the near-term forecast. Having said so, at this point the MoM (sa) of OER in our forecast is probably too low for the next two months (we have it at 38bps in Nov and 40bps in Dec) and we are likely to revise it higher in the coming weeks (please see slide 14 here). We expect Nov core CPI at 28bps but again, it can be revised up. We also expect the YoY of core CPI (PCE) at 3.2% (2.8%) in December 2024.
Translation CPI/PCE: our translation of today’s core CPI print is 22bps in core PCE space. Please, be aware that this is VERY tentative and it can change with PPIs.
Evidence from our models: big picture unchanged. In CPI space the distribution of price changes remains different than pre-Covid. Please, note that once again the distribution is suggesting NO progress at all in the last 9 months, contrary to the dominant narrative. The CI model suggests that the common component remains solid and close to 3%. Finally, the “main” medium-term model is unchanged and the forecast remains above the SEP.
To us, the big picture is clear and remains the same: without a recession, we are in a 3% inflation environment in CPI space (2.5% in PCE space). The Fed cut because it had no choice. Going forward, it seems that the December SEP can look similar to the June SEP, which was more hawkish than the September SEP.
Table 1. Updated MoM (sa) UnderlyingInflation forecast errors in the last 6 months.
A PDF containing all relevant CPI charts has been posted. You can download it here.
Evidence from the distributions
Distribution, still unfriendly and not consistent with target. This month, the distribution remains very dispersed, even more than last month (ridge plot here). The median (Figure 2) ticked up. Looking at Figure 1, the broad picture is unchanged: the distribution remains different than pre-Covid, with zero progress in the last 9 month. For this reason, as we wrote in previous notes, we remain careful in declaring victory or claiming that 2% is around the corner.
Figure 1. Kernel of CPI excluding food and energy items changes (MoM %, a.r.)
Note: the Figure shows the fitted Kernel (Epanechnikov) distribution of MoM percent changes at annual rate of CPI prices excluding food and energy items.
Figure 2. Median (core) CPI metrics
Note: the Figure shows the median (MoM %, a.r.) of the distribution of CPI prices changes excluding food and energy items (left panel) and the YoY (right panel).
Evidence from our CI-C model
Our CI model estimates that net of Covid and idiosyncratic shocks, the common component remains above target. Figure 3 shows the decomposition of the MoM of core CPI in the “common” vs “idiosyncratic” component. The model estimates that this month the common component increased by 17bps, while the idiosyncratic shock is small positive (11bps). The 3m/3m of the “common” component (Figure 4) is at 2.8%. Overall, the evidence of the CI model suggests that the “true” underlying pace of the data remains above target and close to 3%.
Figure 3. Contributions to MoM changes of CPI excluding food and energy items (CI-C model)
Note: the Figure shows the decomposition of the MoM percent changes of CPI prices excluding food and energy items. The contributions are estimated using our CI-C model, a 2-stage OLS-LASSO regression model.
Figure 4. Estimated “Common” component: YoY, 3m/3m a.r. and 6m/6m a.r.
Note: the Figure shows the 3m/3m at annual rate (green line), the 6m/6m at annual rate (red line), and the YoY (blue line) of the “common component” estimated using our CI-C model.
Implications for the medium-term forecast of core PCE price inflation
The medium-term forecast is little changed. This is the first time we put Q4 in-sample. Today’s data had limited impact on our Q4 nowcast (2.7% QoQ saar) in core PCE space, and therefore had no material effect on the model forecast. The (Q4/Q4) model forecast is: 2.8% in 2024, 2.4% in 2025, 2.4% in 2026, and 2.35% in 2027.
Figure 5. “Main” Phillips curve model forecast, core PCE price inflation (YoY, %).
Note: the figure shows the latest run of our “main” Phillips curve model. The confidence intervals (C.I.) are estimated using quasi-out-of-sample methods (estimate the model over a sub-sample, forecast, and calculate the root mean squared forecast errors).