MNI 5 THINGS: Downside Risk To US CPI, Little Risk To Core

By Holly Stokes

     WASHINGTON (MNI) - The Consumer Price Index will be released Tuesday, and

the outlook among analysts is for overall CPI to rise 0.2% as the core component

also increases 0.2%.

     Ahead of the release, we outline five themes for particular attention.

--ANALYSTS' HISTORY OF MAY OVERESTIMATES

     Analysts' history of overestimating CPI suggests a downside risk for May.

Not only have analysts overestimated CPI for the past two months, but they have

shown a tendency to regularly overestimate May CPI in the last ten years - with

six overestimates, including the last three years. In the past ten years,

analysts have overestimated CPI by an average of 0.1pp, suggesting a small

downside risk to the current 0.2% estimate. 

--HISTORY SUGGESTS LOW RISK TO CORE CPI FORECAST

     Analysts core CPI forecasts are typically much more accurate. In the past

ten years, analysts' expectations for core CPI have come in correct six times,

with the remaining four misses split evenly between upside and downside -

suggesting no clear directional risk. Further, the absolute average miss in the

last ten years has been just 0.05pp. If analysts are correct, and May core CPI

rises 0.2% month/month, this would set year/year to rise 2.2%, the fastest pace

seen since February of last year, and continuing the above 2.0% gains seen since

free unlimited data plans stopped dampening inflation.

--DOWNSIDE RISK TO BOTH MARKET AND ANALYST EXPECTATIONS

     Market participants expectations for CPI are in line with analysts, as both

pencil in a 0.2% rise month/month. In the past year, markets have not had a

strong track record of accurately forecasting CPI, only correctly estimating the

measure three times and having an absolute average miss of 0.2pp. Both markets

and analysts have shown a tendency to overestimate in the last 12 months - and

coupled with the history of analysts to overestimate May, there is a clear

downside risk to the forecast. However, if analysts and markets are correct in

their forecast for a 0.2% rise in CPI month/month, this would lift year/year to

2.7% or 2.8% depending on the unrounded strength. A 2.8% reading would be the

largest year/year rise since February 2012.  

--ENERGY COULD GIVE SMALL BOOST

     Last month energy climbed 1.4%, led by a 3.0% rise in gasoline. Now many

analysts forecast that energy, while still expected to be a positive, should

cool off a little from last month's surge. AAA data suggest another mid-month

rise in prices from April, but with questions of seasonal adjustments, analysts

are divided as to whether energy should be a positive or flat reading. Given the

2.2% drop in CPI energy in May 2017, there should be a considerable jump in the

year/year. Casting some more uncertainty than usual for the energy component of

CPI: typically analysts are able to adjust CPI energy forecasts after seeing the

PPI report, but as the May PPI report will be released after analysts have less

predictive information than usual for their forecasts. 

--LOOK FOR MODEST REBOUND IN CORE GOODS

     Core goods have dragged in the past two months posting 0.1% declines in

each that helped to partially offset the stronger gains in core services. Now,

analysts hope that core goods could be due for a modest rebound, as components

that dragged March and April could end their negative streaks. In particular,

new and used vehicle prices have been a considerable weight on CPI core goods.

CPI new vehicles have declined or come in flat for the last four months, as used

cars and trucks have dragged for three consecutive months, with April dropping

1.6%. Analysts expect that auto prices may have recouped to end these drags.

While this would be a positive for core goods, questions of apparel lead to more

uncertainty. Apparel prices have been volatile in recent months, continually

surprising analysts and creating further uncertainty as to whether the category

will provide strength despite expectations for a flat reading. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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