Due to statistical technical factors, the U.S. December CPI may experience a significant rebound. Simultaneously, the December inflation data will also serve as a key validation point for the transmission effects of U.S. tariffs. According to Zhui Feng Trading Desk, Morgan Stanley anticipates a notable rebound in the U.S. core CPI for December, projecting a month-over-month increase of 0.36%, substantially higher than the October-November average of 0.08%. This rebound is primarily attributed to statistical distortions during the government shutdown, rather than a genuine rise in inflationary pressures.
Morgan Stanley indicates that for investors, strong data might be discounted by the market as technical noise, whereas weak data could be interpreted as a strong signal of cooling inflation. The firm believes the probabilities of the core CPI rounding to 0.3% and 0.4% are fairly even, but the risk of a 0.5% reading is higher than that of a 0.2%. It is noteworthy that the October-November data showed almost no signs of tariff effects passing through to goods prices; the December data will provide a clearer picture of this transmission. Morgan Stanley posits that if the December data meets expectations, the price transmission related to tariffs this year will have contributed approximately 45 basis points to the year-over-year core CPI growth rate. A "Revengeful" Rebound Driven by Statistical Distortions Morgan Stanley states that the December CPI data will reflect two major statistical biases caused by the government shutdown:
Bimonthly Sampling Bias: For certain goods and services outside the three major cities of Chicago, Los Angeles, and New York, prices are collected on a bimonthly basis. Due to the absence of October data, the Bureau of Labor Statistics carried forward August prices to October, effectively assuming zero inflation for these cities in October. December will involve a fresh survey of these cities, leading to a lower base for price comparisons. Morgan Stanley estimates that CPI categories significantly affected by bimonthly sampling averaged only a 0.10% month-over-month increase in October-November, compared to a potential underlying trend of 0.23%. By comparing data from the three major cities with the overall figures, the firm anticipates the bimonthly sampling will contribute roughly 8 basis points of upward bias to the December core CPI. Holiday Discount Bias: The delay of November price collection until the end of the month implicitly overweighted holiday promotional discounts, artificially suppressing core goods prices (excluding autos). This bias has existed historically but was amplified this year due to the survey delay. Morgan Stanley has consequently added an extra 3 basis points to its core CPI forecast to account for this.
Broad-Based Inflation Acceleration, Led by Core Goods Looking at the components, Morgan Stanley points out:
Core Goods Inflation Hits Yearly High: Core goods are projected to increase 0.59% month-over-month in December, which would be the highest monthly gain in 2025. Within this, new car prices are expected to rise 0.21%, used cars 0.80%, apparel to surge 1.00%, and other core goods to increase 0.70%. JD Power data indicates car prices maintained positive growth in December, and seasonal factors are expected to further boost used car prices. Rent Inflation Normalizing: Owners' Equivalent Rent (OER) was assumed to be 0% in October due to missing data, but November already showed signs of normalization. Morgan Stanley expects OER to increase 0.27% month-over-month in December, with primary residence rent rising 0.18%, roughly in line with November levels. OER and primary residence rent are expected to average around 0.26% monthly growth in the coming months, with a potential pickup after April. Core Services Ex-Housing Rebounds: This component is forecast to grow 0.34% month-over-month in December, significantly higher than the October-November average of 0.08%. Airfare prices are expected to decline 0.50% (though the pace of decline is narrowing), hotel prices are projected to turn positive with a 0.30% increase, medical care services to rise 0.25%, and motor vehicle insurance to increase 0.10%. Headline CPI Rebounds in Tandem: The headline CPI is projected to increase 0.37% month-over-month in December, translating to a 2.7% year-over-year rate. Energy inflation is slowing but remains positive (0.43% MoM), while food inflation is accelerating to 0.37%, partly influenced by the bimonthly sampling distortion.
Focus on Three Key Issues
Uncertainty Regarding the Rebound Magnitude
Although an upward bias in December is certain, precisely distinguishing the "signal" from the "noise" is extremely challenging. Morgan Stanley candidly admits its forecast might be conservative, with the probability of an actual 0.5% month-over-month reading being higher than that of a 0.2%.
Sustainability of the Housing Inflation Slowdown
December will provide the second "clean" observation following the significant drop in September data, helping to determine whether housing inflation has truly entered a lower trajectory.
Timing of Tariff Pass-Through Effects
The October-November data did not clearly show tariff effects passing through to goods prices. Morgan Stanley believes this was due to statistical noise masking the real effect, and the December data will be a crucial validation window—tariffs have already cumulatively added 35 basis points to core inflation this year, with an expected increase to 45 basis points this time, exceeding half of Morgan Stanley's projected total impact (assuming tariff levels remain unchanged).
The Battle Between Signal and Noise
Based on the CPI forecast, Morgan Stanley expects the core PCE for December to increase 0.37% month-over-month, significantly higher than the October-November average of 0.13%. Since 70% of the prices in the PCE basket come from the CPI index, the upward bias in CPI will directly feed into PCE. Financial services are expected to slow due to lower equity returns in November (0.35%), airfare will remain relatively weak (0.25% MoM), and medical care services will be close to the underlying trend (0.19%). Morgan Stanley specifically notes that strong data is highly likely to be labeled "statistical distortion" and discounted by the market, whereas weak data could serve as a powerful signal of disinflation. This asymmetry implies that if the December CPI falls below expectations, it could provide a more significant boost to rate-sensitive assets; conversely, data meeting or slightly exceeding expectations might not trigger a sharp market reaction. Overall, the December CPI reading will be one filled with technical noise. Investors will need to look through the statistical distortions to discern the true inflation trend, while closely monitoring the more substantive clues provided by tariff pass-through and housing inflation.
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