Where Are the Discrepancies in This Round of CPI? Three Judgments from Morgan Stanley, Nomura, and Citigroup

Editor’s Note: Ahead of the release of the U.S. September CPI, Wall Street's predictions for overall inflation are relatively consistent, but there are discrepancies in the judgments regarding core inflation.

Morgan Stanley, Nomura, and Citigroup expect the overall CPI month-on-month increase to be 0.62%, 0.58%, and 0.62%, respectively, all close to the market consensus of 0.6%. However, for the core CPI, which excludes food and energy, their predictions are 0.24%, 0.227%, and 0.18%. After rounding, they all show as 0.2%, which appears to show no significant difference.

The real divergence lies in the direction of risk. Morgan Stanley believes the likelihood of the core CPI rising to 0.3% is higher than it falling to 0.1%; Citigroup believes the probability of a 0.1% reading is higher. Nomura expects that the impact of rising telecommunications service prices from last month will fade, leading to a slowdown in core inflation.

The key to this round of data is whether, aside from gasoline price increases, there is still strong upward pressure on service and goods prices, and whether the slowdown in housing inflation can continue to lower the core reading.

TL;DR

• The prediction gap for overall CPI is limited, with the main divergence focusing on the composition and unexpected direction of core inflation.

• Morgan Stanley's baseline prediction is slightly on the hot side, with airfares and hotel prices posing significant upside risks to core CPI.

• Nomura expects the boosting effect of telecommunications services to weaken, with core inflation slowing first reflected in the fading of last month’s disturbances.

• Citigroup's prediction is the most conservative, with cooling housing, limited service price increases, and weak energy cost transmission collectively supporting a lower core reading.

• Even if the core CPI also shows as 0.2%, different combinations of components may correspond to different inflation judgments.

Morgan Stanley: Core Inflation Slightly Hot, Airfares and Hotels May Bring Upside Surprises

Morgan Stanley predicts that the overall CPI will rise by 0.62% month-on-month in September and by 3.69% year-on-year, mainly driven by a significant rise in gasoline prices. Its core CPI month-on-month forecast is 0.24%, slightly above the average estimate of 0.22% from Bloomberg's survey at that time.

Morgan Stanley's judgment still includes a slowdown in core inflation compared to last month, but the degree of slowdown may be limited. It believes the likelihood of the core CPI showing as 0.3% is higher than that of showing as 0.1%.

Upside risks mainly come from airfares and hotels. If these service components perform better than expected, they could further push up the core reading, which is already close to the rounding boundary.

Therefore, the key to understanding Morgan Stanley's viewpoint is to observe whether some service prices can offset the cooling of other components. If airfares and hotels see strong increases, the core CPI may not meet market expectations even if it shows an overall slowdown.

The performance of a few strong service components versus widespread price acceleration still needs to be judged separately. If the data is on the hot side, whether the driving factors are concentrated will affect the market's interpretation of inflation persistence.

Nomura: Telecommunications Service Disturbances Fade, Core CPI Expected to Decline

Nomura predicts that the overall CPI will rise by 0.58% month-on-month in September, with the core CPI rising by 0.227%, lower than August's 0.290%.

Its explanation for the slowdown in core inflation is very specific: the boosting effect of wireless telecommunications service prices is weakening.

This means that the relatively high core reading in August was partly driven by the telecommunications service component. As this effect fades, the reading for September is expected to decline. Nomura's analysis thus focuses on the sources of monthly price fluctuations: to judge the inflation trend, it is necessary to identify which increases may persist and which are temporary disturbances.

In terms of predicted values, Nomura is slightly lower than Morgan Stanley and higher than Citigroup. All three expect core increases to slow compared to last month, but Nomura emphasizes the exit of previous boosting factors.

Nomura's judgment suggests that the decline in core CPI can first be driven by the fading of component disturbances, which does not necessarily mean that all price pressures are simultaneously weakening. If telecommunications services cool while housing, airfares, or hotels remain strong, the final reading may still hover around 0.2%; the performance of other components will determine whether the cooling can further expand.

Citigroup: Housing Continues to Cool, Core CPI Risks Lean More Towards Downside

Citigroup predicts that the overall CPI will rise by 0.62% month-on-month in September, with the core CPI rising by 0.18%, the lowest core prediction among the three.

Compared to Morgan Stanley, Citigroup's judgment on unexpected direction is the opposite: it believes the risk of the core CPI showing as 0.1% is higher than that of showing as 0.3%.

The factors supporting this judgment mainly include three: housing inflation is still cooling, overall service price increases are moderate, and the transmission of energy costs to commodity prices is limited.

Whether housing can continue to cool is an important clue to test Citigroup's judgment. Airfares and hotels may bring monthly fluctuations, but if housing and other service components perform moderately, the overall increase in core CPI may still be suppressed.

The transmission of energy costs determines another issue: to what extent will gasoline price increases extend to core commodities? Citigroup expects this transmission to be limited, so the overall CPI can rise while the core CPI cools simultaneously.

The predicted combination it provides reflects this point: overall CPI rises by 0.62%, while core CPI only rises by 0.18%. In Citigroup's judgment, energy drives the overall inflation increase, but this is not enough to indicate a broader resurgence of price pressures.

Whether the Discrepancy Can Be Resolved Depends on the Composition of Core CPI Components

The differences among the three institutions can be summarized into three observation focuses: Morgan Stanley looks at the upside risks of airfares and hotels, Nomura looks at the fading disturbances of telecommunications services, and Citigroup looks at the cooling of housing and broader service prices.

This also explains why a core CPI reading of 0.2% may not be sufficient to end the debate.

If housing slows significantly, but airfares and hotels remain strong, the cooling factors emphasized by Citigroup and the upside risks worried by Morgan Stanley may occur simultaneously; if the core reading declines mainly due to telecommunications services, it aligns more closely with Nomura's explanation of fading component disturbances, and judgments on broader inflation trends still require support from other data.

If the core CPI ultimately shows as 0.3%, the result will be closer to the direction worried by Morgan Stanley, but whether it represents an increase in persistent pressure will depend on whether the increases are widespread. If it shows as 0.1%, it will be closer to Citigroup's risk judgment, which also requires observation of whether the cooling is concentrated in a few components.

The core issue of this round of CPI is the upward pressure on service prices versus the cooling of housing, which has a greater impact on the final reading. The baseline predictions of the three institutions are similar, but they provide different answers regarding the sources and persistence of price pressures.