Morgan Stanley's Predictions for the US September CPI Report: Core Inflation Insights and Market Implications

Morgan Stanley has released its forecast for the upcoming September Consumer Price Index (CPI) report, expecting core inflation to rise by 0.26%, which slightly surpasses the consensus estimate of 0.2%. This anticipated increase in core inflation is primarily attributed to improvements in goods inflation, particularly in used cars and airfares, while services inflation is expected to show a deceleration.

The firm projects that the year-over-year core CPI will remain steady at 3.2%. Goods inflation is anticipated to benefit from positive trends in used car prices, alongside stable airfares. In contrast, services inflation is likely to slow down, mainly due to a decrease in shelter inflation. Morgan Stanley suggests that the recent uptick in Owners' Equivalent Rent (OER) may have been influenced by temporary seasonal factors, predicting a partial correction in this area.

In terms of headline inflation, Morgan Stanley estimates a modest increase of 0.09% month-over-month, which is expected to be lower than the core CPI. The non-seasonally adjusted (NSA) headline CPI index is projected to reach 314.718. This decline in headline inflation is largely attributed to decreasing gasoline prices, which are anticipated to bring headline inflation below core inflation levels.

The CPI forecast aligns with expectations for core Personal Consumption Expenditures (PCE) inflation, projected at 0.19% month-over-month, compared to 0.13% in August. While used cars are expected to see an acceleration in inflation, their impact on the PCE will be limited due to their lower weight in the core PCE calculation.

Additionally, Morgan Stanley foresees an acceleration in health services CPI following two months of subdued performance, while expecting softer inflation in financial services and airfares.

Overall, Morgan Stanley's analysis presents a nuanced outlook for the September US CPI report, indicating a modest rise in core inflation amidst mixed trends in goods and services prices. The anticipated decline in headline inflation, driven by falling gasoline prices, could significantly influence market perceptions regarding the Federal Reserve's monetary policy direction. This report is crucial for assessing inflation trends and their potential implications for future interest rate decisions.