Where does the divergence in this round of CPI lie? Three judgments from Morgan Stanley, Nomura, and Citi.

Editor's note: Ahead of the release of U.S. September CPI, Wall Street had a relatively consistent forecast for headline inflation, but views diverged on core inflation.

Morgan Stanley, Nomura and Citi expect headline CPI month-over-month gains of 0.62%, 0.58% and 0.62%, respectively, all close to the 0.6% market consensus. But for core CPI excluding food and energy, their forecasts were 0.24%, 0.227% and 0.18%, respectively. After rounding, they all show 0.2%, appearing to show no obvious difference.

The real disagreement lies in the direction of risk. Morgan Stanley believes the possibility of core CPI rising to 0.3% is higher than falling to 0.1%; Citi sees a higher probability of 0.1%. Nomura expects that the fading upward push from last month's telecommunications services prices will drive core inflation to slow.

The key to this round of data is: beyond higher gasoline prices, whether services and goods prices still face relatively strong upward pressure, and whether cooling housing inflation can continue to push core readings lower.

TL;DR

· Forecast differences for headline CPI are limited, and this round's divergence is mainly concentrated in the composition of core inflation and the direction of surprises.

· Morgan Stanley's baseline forecast is slightly hot, with airfares and hotel prices posing important risks for core CPI to exceed expectations to the upside.

· Nomura expects the upward push from telecommunications services to weaken, with the slowdown in core inflation first reflected in the fading of last month's component distortions.

· Citi's forecast is the mildest, with cooling housing, limited services gains and weak pass-through of energy costs jointly supporting a lower core reading.

· Even if core CPI also shows 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 expects September headline CPI to rise 0.62% month-over-month and 3.69% year-over-year, mainly driven by another sharp increase in gasoline prices. Its core CPI month-over-month forecast is 0.24%, slightly above the then-Bloomberg survey average estimate of 0.22%.

Morgan Stanley's judgment still includes core inflation slowing from the previous month, but the pace of slowing may be limited. It believes the possibility of core CPI printing at 0.3% is higher than printing at 0.1%.

Upside risks mainly come from airfares and hotels. If these services components are stronger than expected, they could further push up an already rounding-boundary core reading.

Therefore, the key to understanding Morgan Stanley's view is to observe whether price increases in some services can offset the cooling in other components. If airfare and hotel price increases are relatively strong, core CPI may not meet market expectations even if it slows overall.

Strength in a small number of service components versus broad-based price acceleration still needs to be assessed separately. If the data comes in hot, whether the driving factors are concentrated will affect the market's interpretation of inflation persistence.

Nomura: Telecom Services Distortion Fades, Core CPI Expected to Fall Back

Nomura expects September headline CPI to rise 0.58% month-over-month, with core CPI up 0.227% month-over-month, below August's 0.290%.

Its explanation for the core inflation slowdown is very specific: the upward push from wireless telecommunications services prices is fading.

This means that August's relatively high core reading was partly driven by the telecommunications services component. As this effect fades, the September reading is expected to fall back. Nomura's analysis thus focuses on the sources of monthly price fluctuations: to judge the inflation trajectory, one needs to identify which increases may persist and which are temporary distortions.

In terms of forecast figures, Nomura is slightly below Morgan Stanley and above Citi. All three expect the core increase to slow from the previous month, but Nomura emphasizes the exit of previously driving factors.

Nomura's assessment suggests that a decline in core CPI can be driven first by the fading of component distortions, and does not necessarily mean that all price pressures are easing simultaneously. If telecommunications services cool while housing, airfare, or hotels remain strong, the final reading could still stay around 0.2%; the performance of other components will determine whether the cooling can broaden further.

Citi: Housing Continues to Cool, Core CPI Risks Skewed to the Downside

Citi expects September headline CPI to rise 0.62% month-over-month, with core CPI up 0.18% month-over-month, the lowest core forecast among the three.

Compared with Morgan Stanley, Citi's judgment on the direction of surprise is the opposite: it believes the risk of core CPI printing at 0.1% is higher than the risk of it printing at 0.3%.

Three main factors support this judgment: housing inflation is still slowing, overall services price increases are relatively moderate, and the pass-through of energy costs to goods prices is limited.

Whether housing can continue to cool is an important clue for testing Citi's judgment. Airfare and hotels may bring single-month volatility, but if housing and other service components remain moderate, the overall increase in core CPI may still be contained.

The pass-through of energy costs determines another question: to what extent will gasoline price increases extend into core goods? Citi expects this pass-through to be limited, so headline CPI rising while core CPI cools can occur simultaneously.

The forecast combination it provides reflects exactly this: headline CPI up 0.62% month-over-month, core CPI up only 0.18%. In Citi's judgment, energy driving headline inflation higher is not sufficient to suggest that broader price pressures are re-accelerating.

Whether the divergence can be resolved depends on the sub-component composition of core CPI

The differences among the three institutions can be boiled down to three key areas of focus: Morgan Stanley sees upside risks in airfares and hotels, Nomura sees the dissipation of telecom services distortions, and Citi sees cooling in housing and broader services prices.

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

If housing slows markedly but airfares and hotels remain firm, the cooling factors emphasized by Citi and the upside risks feared by Morgan Stanley could appear simultaneously; if the decline in the core reading mainly comes from telecom services, it would be closer to Nomura's explanation of dissipating sub-component distortions, and the judgment on broader inflation trends would still require support from other data.

If core CPI ultimately comes in at 0.3%, the result would be closer to the direction Morgan Stanley fears, but whether it represents strengthening sustained pressure depends on whether the increase is broad-based. If it comes in at 0.1%, it would be closer to Citi's risk assessment, and it would likewise require observing whether the cooling is concentrated in a few sub-components.

The core question of this CPI round is which side has a greater impact on the final reading: upward pressure on services prices or cooling in housing. The three institutions' baseline forecasts are similar, yet they give different answers on the sources and persistence of price pressures.

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