Morgan Stanley: What we expect from the US September CPI report on Thursday

Morgan Stanley forecasts that the September CPI report will show core inflation rising by 0.26%, slightly exceeding consensus expectations. While goods inflation is expected to improve due to used cars and airfares, services inflation is projected to decelerate. The report’s implications for headline and core inflation will guide expectations for the Fed’s monetary policy stance.

Key Points:

• Core CPI Expectations:

  • Morgan Stanley expects core CPI prices to rise by 0.26% in September, compared to a consensus of 0.2%. The year-over-year core CPI is projected to remain at 3.2%.
  • Goods inflation is expected to show positive movement, driven by used cars, while airfares inflation also remains positive.

• Services Inflation Dynamics:

  • Services inflation is anticipated to decelerate, primarily as shelter inflation steps down. The firm believes that the recent upswing in Owners’ Equivalent Rent (OER) may have been influenced by temporary seasonal factors and expects a partial correction in this metric.

• Headline CPI Forecast:

  • Morgan Stanley projects headline CPI to be lower than core CPI, estimating a rise of 0.09% month-over-month, with the non-seasonally adjusted (NSA) headline CPI index expected at 314.718.
  • This decline in headline inflation is attributed to lower gasoline prices, which are expected to push headline inflation below core inflation.

• Core PCE Inflation Implications:

  • The CPI forecast aligns with expectations for core Personal Consumption Expenditures (PCE) inflation at 0.19% month-over-month, compared to 0.13% in August.
  • Used cars, despite their lower weight in the core PCE calculation, are expected to accelerate in inflation, but their impact on PCE will be limited compared to the CPI.

• Additional PCE Component Expectations:

  • Morgan Stanley anticipates an acceleration in health services CPI following two months of weak performance, while expecting softer inflation in financial services and airfares.

Conclusion:

Morgan Stanley’s analysis indicates a nuanced outlook for the September US CPI report, with expectations of a modest rise in core inflation amidst mixed trends in goods and services prices. The anticipated lower headline inflation, driven by falling gasoline prices, could shape market perceptions regarding the Fed’s monetary policy direction. Overall, the report will be pivotal in assessing inflation trends and potential impacts on future interest rate decisions.

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This article was written by Adam Button at www.forexlive.com.