CPI Countdown: What Do Goldman Sachs Analysts Say?
If the data significantly exceeds or falls short of expectations, it could lead to more uncertainty regarding the Federal Reserve’s rate cut path or U.S. economic growth.
The U.S. is set to release its August CPI inflation report at 8:30 PM tonight. Goldman Sachs forecasts that the core CPI for August will show a month-on-month increase of 0.23% and a year-on-year increase of 3.17%. They also expect the overall CPI to rise 0.18% month-on-month, with a year-on-year increase of 2.56%.
The bank's forecast for August's core CPI is higher than the 0.13% average pace over the past three months, as lower readings in recent months were largely due to significant declines in airfares and used car prices, which averaged drops of 3.4% and 1.1%, respectively. However, for August, Goldman expects airfares to recover slightly, while the decline in used car prices is expected to be more moderate. They also expect car insurance prices to rise steadily once again. Additionally, after a sharp rise last month, Goldman forecasts housing inflation will ease somewhat.
In more detail, Goldman highlights the trends in two key components of this month’s CPI report. First, they expect car insurance prices to continue rising by 0.7% in August, reflecting ongoing premium increases, though at a slower pace. In comparison, the average monthly increase in car insurance prices so far in 2024 has been 1.2%. Higher car prices, repair costs, medical expenses, and litigation fees have forced insurers to raise premiums, though the time lag in passing on these costs to consumers has been longer due to the need to negotiate with state regulators. Currently, the gap between premiums and costs has largely narrowed.
Therefore, Goldman expects that the rise in car insurance prices within the CPI will return to pre-pandemic levels by next year. Notably, car insurance has a smaller weight in the PCE index, and its data source differs, so Goldman does not anticipate these changes to have a significant impact on PCE inflation.
The second key component is housing. After a notable increase in July, Goldman expects housing inflation to moderate, with Owner's Equivalent Rent (OER) rising by 0.33% and primary rents increasing by 0.29%. Looking ahead, Goldman believes that slightly stronger growth in single-family home rents may lead to OER growth in the CPI surpassing regular rent increases. The bank forecasts that overall housing inflation will maintain a monthly growth rate of about 0.3% through December 2024.
Additionally, Goldman expects this month’s CPI to be slightly boosted by a rebound in medical services inflation after a sharp decline in July, along with the postal rate increase that took effect in mid-July but was not fully reflected in the previous month’s report.
Dom Wilson, a senior market advisor at Goldman Sachs, notes that the market’s focus has shifted from economic growth to inflation, resulting in less attention being paid to the CPI than before. Given the recent mild performance of core inflation, the market may be more sensitive to data that exceeds expectations. Wilson sees some downside risk for tonight’s CPI but also believes it may not resolve the ongoing debate over the extent of future rate cuts.
Shawn Tuteja, who handles ETF/basket volatility trading at Goldman, observes that the market is currently focused on two key themes: 1) whether the Federal Reserve is behind the curve, and 2) the U.S. presidential election. He points out that tonight’s CPI may not carry as much weight, but even a very low CPI figure is unlikely to prompt the Fed to cut rates by 50 basis points in September. However, if the CPI significantly exceeds expectations, he believes the unwinding in cyclical sectors will be larger compared to the tech sector.
Joe Clyne, who oversees index volatility trading, notes that the volatility backdrop ahead of this month’s CPI is very different from other key data release days this year. Baseline volatility levels are higher, and the volatility skew is steeper, indicating market concerns about growth prospects and the possibility that the Federal Reserve is behind the curve. His team agrees with other analysts that the FOMC meeting is a bigger catalyst than the CPI. However, he still believes a lower-than-expected CPI could ease concerns about the Fed’s ability to cut rates as the market expects.
Looking ahead, Goldman forecasts that the core CPI will rise by about 0.2% each month for the remainder of this year. In terms of market reaction, Goldman’s view is that a reading close to expectations would be the best outcome, helping the market navigate some recent risk events while reducing stock market volatility in the short term. However, if the data significantly exceeds or falls short of expectations, it could introduce more uncertainty regarding the Fed’s rate cut path and U.S. economic growth.
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