US CPI Preview: Forecasts from 10 major banks, inflation to fall below 3% for first time in nearly three years

We expect core CPI inflation to have risen 0.2% MoM in January, and headline by 0.1% MoM. 

We expect the core rate, i.e. consumer prices excluding energy and food, to rise by 0.3% from the previous month and thus at the same pace as in November and December. Inflationary pressure continues to come primarily from rents. As energy prices are likely to have fallen, we expect the overall price index to rise by only 0.2%. If our expectations come true, the figures would not provide a clear indication. This is because they would certainly not be high enough to call the downward trend into question, but would also not indicate any clear progress, even if the annual rates are likely to fall slightly – depending on the revisions. We assume that the Fed will not cut interest rates at the next meeting in March. However, it is likely to do so at the following meeting in May.

We expect CPI inflation to remain relatively benign (0.1% MoM) with a further fall in gasoline prices and a renewed fall in used car prices offsetting continued firmness in services (housing rents and medical) inflation. Headline annual inflation is expected to fall to the symbolic 2-handle for the first time since early 2021.

We expect gains in the headline measure to slow to 0.2% MoM from 0.3% in December but see growth in core staying at 0.3%. This would equate to core YoY CPI inflation falling two-tenths to 3.7%, while that for headline would fall by four-tenths to 2.9%. The three-month annualised rate would rise two-tenths to 3.5% while the six-month annualised rate would tick up a tenth to 3.3% largely due to base effects. 

We look for headline CPI growth (YoY) to fall below 3% for the first time in almost three years (since March 2021). Most of that slowing is expected to come from a pullback in energy prices and another drop in food price growth. Core price growth, which excludes food and energy products, should ease less – we expect 3.8% YoY in January from December’s 3.9%. But a disproportionate share of that increase still comes from higher home rents. The growth in shelter costs will continue to slow as lower market rents gradually feed through to leases. Price growth of goods has slowed back to around zero as the impact of acute global supply chain disruptions earlier ease.

We look for core inflation to stay relatively unchanged at 0.3% MoM in January, with the headline likely slowing a tenth to 0.1%. Our unrounded core CPI forecast at 0.27% MoM suggests it will be a close call between a 0.2% and a 0.3% gain. Our projections imply that inflation likely lost speed again on a YoY basis in January as we look for inflation to drop to 3.0% for the headline (after 3.4% YoY in December), and to ease to 3.8% YoY for the core series (after 3.9% in January).

The energy component is likely to have had a negative impact on the headline index, limiting its monthly to only 0.2%. If we’re right, the YoY rate could fall from 3.4% to a 7-month low of 3.0%. Core prices, for their part, could show a 0.3% monthly progression, led by another increase in the shelter component. This would translate into a 1-tick decline of the 12-month rate, to a 32-month low of 3.8%.

Fed officials want more evidence inflation is on a sustainable path back to 2% before they start easing. Tuesday’s US CPI report should only marginally add to that evidence, as we expect core inflation to ease by only 0.1pp to 3.8% YoY (0.3% MoM) while we forecast a decrease in headline to 2.9% YoY from 3.4%.

We expect inflation to continue to recede and forecast the headline CPI to rise 0.2% in January, which would push the year-ago pace down to 3.0%. Falling gasoline prices and moderating price increases at the grocery store should keep the headline gain in check. Core inflation likely continued to cool more slowly last month, and we anticipate the core CPI rose 0.3%, translating to a 3.7% year-ago pace. We ultimately look for inflation to cool further this year, albeit at a slower rate than in 2023, and believe price growth is still more likely to modestly overshoot rather than undershoot the Fed's target. The inflation data will continue to garner most of the Fed's attention this year as it tries to fine-tune the precise timing of rate cuts. We continue to believe the first cut will come in May, though risks look tilted more toward June rather than March based on recent data.

Much to the Fed’s delight, CPI is becoming boring again. We expect more of the same in January’s CPI report. Core inflation will remain in a range broadly consistent with target, coming in at 0.3% MoM, and headline inflation should come in a touch softer at 0.2% MoM. The Fed will be paying close attention to the composition, looking for more progress from service inflation. But they do not need to see a lot of progress in that rotation in this release as time continues to be on their side. Rebalancing in the used car market and passthrough from weak Chinese import prices should keep a lid on core goods prices, mitigating the influence of higher shipping costs.