Thursday’s CPI report is the highlight of the week and the final one before the Feb 1 FOMC decision. The consensus is for a fall 6.5% y/y from 7.1% as the numbers continue to retreat from above 9% in the scary June report.
Equally important is the month-over-month trend, which is expected to show a flat reading in December.
The core side isn’t quite as sanguine with prices expected to rise 0.3% m/m, though the market may strip out some lagged real estate effects. Year-over-year core is forecast at 5.7% from 6.0% in November.
Goldman Sachs economists are slightly below estimates on core at 5.63% y/y and +0.25% m/m and also slightly lower on the headline at -0.06% m/m and 6.43% y/y.
“We highlight three key component-level trends this month. First, we expect new and used car prices to decline (-0.5% and -1.6% respective, reflecting increases in auto dealer promotion incentives and continued declines in used car auction prices. Second, we expect lower oil prices to lead to a 2% pullback in CPI airfares in December. Third, we expect shelter inflation to run at a slower sequential pace in this report (rent +0.67%, OER +0.64%) as rent declines for new-tenant leases start to offset the continued catch-up of continuing-tenant lease rents to market rates,” Goldman writes.
Further out, they see y/y core inflation at 3.0% in December 2023 and 2.6% in December 2024.
The high estimate for the report is 6.8% from ANZ Bank and the low at 6.3% from CIBC.
For its part, CIBC doesn’t offer much insight on why its inflation estimate is low points to gasoline prices and hotel prices as a reason for the below-consensus call:
“There was more relief in the form of lower gasoline prices for
households in December, which will be behind the expected
0.1% monthly decline in total prices. That retrenchment will
have been limited by pressure in food prices and an expected
0.2% advance in the core group (excluding food and energy),
with the latter likely showing strength in core services tied to
the tight labor market, against an easing in core goods prices
on weaker demand and the improvement in supply chains and
inventories.
An easing in monthly hotel prices was behind the deceleration
in shelter costs in December, but rent and owners’ equivalent
rent reaccelerated and are likely to show continued, strong
pressure in December, before peaking in early 2023 in terms of
monthly increases. Outside of shelter, other core services are
the main areas of concern for the Fed, given ties to the tightness
in the labor market, and still strong demand for services. A
measurement quirk has been behind the downward pressure on
core prices from medical care lately, with airfares also adding
to the downside; both areas that aren’t indicative of underlying
demand, and therefore did little to assuage the Fed’s concern.”
A soft report would weigh on the US dollar across the board and spur risk assets, though there are many in the market who believe that recent dollar declines and equity strength is the market front-running an expected strong report.
Here is JPMorgan’s playbook for Thursday’s CPI report.