0.2-0.3 Core, Big Picture Unchanged. We expect the MoM (sa) of core CPI at 0.2% (25bps) and the MoM (sa) of headline CPI at 0.1% (9bps) in September. 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 remains above target at the end of the forecast horizon. Overall, we expect the September report to confirm the Fed thesis: the risk for cutting rates is now acceptable, even if in the end we might remain above target.
Note: last month, our machine learning model (not introduced yet), nailed the MoM forecast for both, core and headline CPI. The current MoM forecasts of the model are: 26bps for core in Sep and 28bps in Oct; 16bps for headline in Sep and 25bps in Oct. The model expects the YoY as follows:
- For core CPI: 3.1% in Dec 2024, and 2.7% in Sep 2025.
- For headline CPI: 2.5% in Dec 2024, and 2.2% in Sep 2025.
The reader can see the model forecast for core CPI here, and for headline CPI here. The model runs daily on 120 series. Send us an email any time to have the latest updates.
Our forecast
We expect headline and core CPI to expand 9bps and 25bps in September, respectively (NSA levels 314.773 and 320.521, 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 27bps and 25bps, 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: 3bps and 8bps, 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 September, 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 3.1% (2.7%) in December 2024.
Figure 3. Cumulative core CPI NSA level by year (New Year’s Eve = 1).
Implications for the “main” model
Unchanged. Conditional on our MoM CPI forecast, the “main” model forecast for core PCE would be unchanged compared to the previous run. The (Q4/Q4) model forecast is: 2.8% in 2024, 2.4% in 2025, and 2.4% in 2026.
Figure 4. Latest forecast of our “main” model for core PCE price inflation (YoY).
