US CPI forecast distribution breakdown

The spread of estimates matters for how markets respond, as a deviation of the actual figure from expectations produces a surprise. The forecast distribution also plays a key role in market reaction.

Indeed, even when a wide range of estimates exists, many forecasts can be concentrated near the top of that range. Consequently, a data release that falls within the range but at the lower end can still generate a surprise.

CPI Y/Y

• 3.8% (4%)
• 3.5% (4%)
• 3.4% (67%) - consensus
• 3.3% (25%)

CPI M/M

• 0.4% (76%) - consensus
• 0.3% (23%)
• 0.2% (1%)

Core CPI Y/Y

• 2.7% (2%)
• 2.5% (6%)
• 2.4% (82%) - consensus
• 2.3% (10%)

Core CPI M/M

• 0.3% (10%)
• 0.2% (88%) - consensus
• 0.1% (2%)

The monthly core CPI figure is the key data point to monitor, as it has been the focus for Fed officials. Waller recently said that he would consider a rate hike in September if the monthly core reading surprises to the upside. That statement came before the recent jump in oil costs, with West Texas Intermediate crude now above $100.

The breach of that psychological barrier has prompted a widespread hawkish repricing, with traders now assigning a 67% probability of a rate increase at the next meeting. In my view, a CPI reading that matches expectations will not be sufficient to shift market expectations away from a rate hike. If the FOMC meeting arrives with elevated rate hike probabilities, the Fed will have to raise rates to prevent a dovish surprise.

Therefore, only a weak core CPI reading can provide temporary relief to the market. Conversely, a stronger-than-expected figure could worsen risk aversion, as traders may anticipate a more aggressive tightening cycle.