MNI 5 THINGS:US January Core CPI Seen +0.2%; Small Upside Risk

     WASHINGTON (MNI) - The Consumer Price Index to be released on Wednesday is

expected to show an overall rise of 0.1%, pulled down by energy prices for a

third consecutive month. Analysts see another 0.2% rise for core CPI in January.

In contrast, market participants are anticipating overall CPI to be unchanged in

the month, after posting two flat readings in November and December. Annual

revisions, which were released on February 11th, will be incorporated into this

report.

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

--NO CLEAR HEADLINE RISK

     Over the last 20 years, analyst forecasts have missed headline CPI 16 times

in the month of January, with an even split between overestimates and

underestimates that average 0.10pp and 0.18pp respectively. A look at just the

past 10 years shows that analysts, who have missed seven times in that period,

still have a fairly even split between the direction of their misses. They

overestimated four times and underestimated three times, with two of these

underestimates occurring in the last two years. With no 

--CORE UPSIDE RISK

     Analysts have underestimated core prices in 10 out of the last 20 years.

Six of these underestimates occurred in just the last 10 years, including in the

two most recent years. Their underestimates average 0.10pp, so a potential

underestimate would likely be relatively small. Compared to other months, during

which analysts rarely miss core CPI, their survey history in the month of

January shows they have accurately estimated core prices in six out of the last

20 years. Based on their history, there is a slight upside risk to this month's

0.2% median forecast. One change that will affect core prices in this report is

the BLS's quality adjustment in telecommunication services. Previously, price

increases in smart phones, phone plans, and cable television were entirely

reflected in the data, even though price increases were due in part to quality

improvements in these products and services. This quality adjustment will

attempt to correct for technological changes in these areas and could soften

price gains.

--MARKETS SEE FLAT READING

     This month, markets and analysts have different expectations for headline

CPI. Markets are anticipating a third flat reading in a row while analysts are a

bit more optimistic in their forecast for a 0.1% rise in prices. Energy prices

are expected to place downward pressure on the headline value this month. The

magnitude of this pressure will be the main determinant in whether market or

analyst expectations are more accurate. In the last year, analysts' forecasts

have been slightly more accurate than markets, with analysts having been on

target five times compared to four times for markets, and missing by an absolute

average of 0.07pp compared to 0.11pp for markets. Since both markets and

analysts have been fairly accurate in their estimates for CPI over the last

year, and their misses have been small on average, a miss by either of them this

month should follow that pattern.

--BASE EFFECTS DRIVE Y/Y DROP

     Particularly strong inflation in January 2018 is expected to cause

year/year inflation to decline for both headline and core inflation for January

2019. In order to maintain the year/year rates of inflation seen in November,

the headline CPI would need to post a month/month gain of 0.5%, while core

inflation would need to post a month/month gain of 0.3%, neither of which are

likely. This base effect should correct itself in the February report as

inflation growth was more in line with trend in February 2018.

--ENERGY PRICES SPOILER AGAIN

     After two consecutive flat readings in November and December after annual

revisions, weakening energy prices once again threaten to put downward pressure

on headline CPI, leading to soft analyst expectations. Data from the Automobile

Association of America shows that the average pump price for gasoline fell by 18

cents in January, following declines of 27 and 22 cents in December and November

respectively, showing that the AAA data is useful in anticipating soft headline

CPI in recent months. It should be noted, however, that the AAA data is not

seasonally adjusted, and it did not capture the full month of January, so it is

possible that energy prices rebounded after the data was recorded.

--MNI Washington Bureau; +1 (973) 494-2611; email: harrison.clarke@marketnews.com

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

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com