US CPI Preview: Forecasts from seven major banks, still to the high side of the Fed’s target

We expect core CPI inflation to rise by 0.3% MoM in October. Headline CPI was likely flat on lower energy prices. 

Our forecasts for the October CPI report suggest core inflation gained additional speed for a third month straight: we are projecting an above-consensus 0.36% MoM increase, modestly up from 0.32% in September. We also look for a 0.10% gain for the headline, as inflation will benefit from the sharp retreat in energy prices. Importantly, the report is likely to show that the core goods segment likely added to inflation, while shelter-price gains probably slowed. Note that our unrounded core CPI inflation forecast could easily turn to a 0.3% rounded gain if some of our key assumptions for October don't come to fruition. Our MoM forecasts imply 3.3%/4.2% YoY for total/core prices.

At first glance, the US consumer prices for October appear to be showing a significant easing of price pressure. This is because consumer prices have probably only risen by 0.1% compared to September. The YoY rate would then fall from 3.7% to 3.3%. However, the main reason for this is that gasoline has become around 5% cheaper. The more important core rate, which excludes the volatile prices for energy and food, is likely to be 0.3%, as in August and September. Overall, there is a risk that the core rate will even trend towards 0.4%. The YoY rate will remain at 4.1% at best anyway, and a decline in October seems very unlikely. The report would not call into question the downward trend in inflation. However, it would remind us that this process is slow and bumpy. In our view, inflation will not fall back to 2% but will stabilize at around 3%.

We expect headline to come in at only +0.1% MoM due to softer energy prices. We think core edges up to +0.4% from +0.3% last month. If we are correct, the YoY rate will be 3.3% and 4.2%, respectively. 

The energy component is likely to have had a negative impact on the headline index, which should translate into a 0.1% increase for headline prices. If we’re right, the YoY rate could fall from 3.7% to a four-month low of 3.3%. The advance in core prices could have been stronger at 0.3%, which should allow core inflation to remain unchanged on a 12-month basis at a two-year low of 4.1%.

October CPI will show that core inflation remains just outside of a range consistent with target, coming in at 0.3% MoM. Weaker energy prices will likely result in a softer headline reading around 0.2% MoM. Inflation will continue to reflect a tug-of-war between firming price pressures in demand-sensitive categories such as core services ex. shelter and easing goods prices from the normalization in supply chains. The Fed will be looking for clues about the persistence of these two forces as it assesses the appropriate degree of monetary restraint. Shelter inflation will also be important to watch as it surprised in September and has been somewhat stickier than expected this year. 

Since the end of September, gas prices have steadily fallen and food inflation has appeared to move sideways. These dynamics underpin our call for the headline CPI to increase only 0.1% in October. If realized, that would be the smallest monthly gain since May. Yet, the modest rise will likely be overshadowed by continued strength in the core CPI, which we expect to increase 0.3% for the third straight month.