What is the distribution of forecasts for the US CPI?

Why it’s important?

The ranges of estimates are
important in terms of market reaction because when the actual data deviates from the
expectations, it creates a surprise effect. Another
important input in market’s reaction is the distribution of forecasts.

In fact, although we can have a range of
estimates, most forecasts might be clustered on the upper bound of the
range, so even if the data comes out inside the range of estimates but
on the lower bound of the range, it can still create a surprise effect.

Distribution of forecasts for CPI

CPI Y/Y

• 2.8% (6%)
• 2.7% (64%) – consensus
• 2.6% (30%)

CPI M/M

• 0.3% (54%) – consensus
• 0.2% (46%)

Core CPI Y/Y

• 3.4% (2%)
• 3.3% (66%) – consensus
• 3.2% (32%)

Core CPI M/M

• 0.3% (79%) – consensus
• 0.2% (21%)

Analysis

We
can ignore the headline CPI as the market will focus on the Core
figures. We can notice that the bias is skewed to the downside, so even if the 3.4% is inside the range of estimates for Core CPI Y/Y, it would still count as an upside surprise.

The market is
pricing an 85% chance of a rate cut at the next week’s FOMC meeting and
at least two more 25 bps cuts in 2025. We will likely need a very hot
report to
force them to skip the December cut as it looks like they really want to
deliver another cut before pausing.

If the
data comes lower than expected, it should strengthen the current market
expectations and might even add a bit more to the 2025 pricing. In this
case, we will likely see a selloff in the US Dollar, a rally in
bonds and risk assets.

Data in line with
estimates shouldn’t change much in terms of market expectations but will
likely trigger the same reaction as if the data came out lower than
expected although with less magnitude.

The worst case scenario would be another hot report, especially in the current context of stretched valuations and heavy risk
taking. The complacency and animal spirits resemble a lot the 2021
mania.

Even if the Fed decides to
cut next week despite a hot CPI, the market will likely scale back further the
rate cuts expectations for 2025 and that could trigger some risk aversion with
the US Dollar rallying across the board and risk assets being sold.

This article was written by Giuseppe Dellamotta at www.forexlive.com.