• Consumer prices rose 0.2% MoM and was up 3.2% YoY

• Core CPI rose a subdued 0.2% MoM and slowed to 4.7% YoY

• Core services increased slightly

• Core goods prices dropped 0.3%

• Subdued core CPI raises hopes that further Fed rate hikes are now off the table

Inflation in the United States edged up in July after 12 straight months of declines. Core inflation matched the smallest monthly rise in nearly two years, a sign that the Federal Reserve’s interest rate hikes have continued to slow price increases.

The Consumer Price Index (CPI) rose 0.2% MoM in July, bang-on the consensus forecast. On annual basis, CPI inched 0.2%-pts higher to 3.2%, though this was due to unfavorable base-effects stemming from a sharp decline in July 2022 energy prices. The latest figure remained far below last year’s peak of 9.1%, though still above the Fed’s 2% inflation target. Energy costs had a much smaller effect on July’s gain – rising a very modest 0.1% MoM – as higher gasoline prices (0.2% MoM) were partially offset by lower electricity (-0.7% MoM) costs. Meanwhile, food prices rose 0.2% MoM. Annual inflation continues to be pushed up by services prices (+6.1% YoY), with housing costs up 7.7% YoY and transportation costs up 9.0%. Eating out is up by 7.1%, almost twice as much as eating in (3.6%). Price increases have been tempered by declines in fuel prices (-20.3% YoY), used cars (- 5.6%) and medical expenses (-1.5%). However, fuel prices show signs of a turnaround, with the index up 3.0% MoM after a 16% jump in WTI last month.

Excluding the direct effects of food and energy, core inflation rose 0.2% MoM – matching June’s gain – and also meeting the consensus forecast. The yearly change edged lower by 0.1%-pts on the month, falling to 4.7%, the lowest since October 2021. Price growth across services rose 0.4% MoM – a slight acceleration from June’s 0.3% MoM gain – and remain at an elevated 6.1% YoY. Shelter costs remained a key source of inflationary pressure, with owners’ equivalent rent (0.5% MoM) and rent of primary residence (0.4% MoM) notching sizeable gains. Excluding shelter, services inflation was up 0.2% MoM, and is up 3.3% YoY. Price growth across non-housing services rose a modest 0.1% MoM – an acceleration from June’s decline of 0.1% MoM. Airfares continued to tumble, with prices down a sizeable 8.1% MoM – exactly matching June’s decline - their fourth monthly decline and an 18.6% YoY drop from this time a year ago. That brings the price index solidly below its pre-pandemic level in February 2020. Medical care (-0.2%), recreation (0.1%), education (0%) and other goods and services (0.1%) all very subdued. That so-called 'supercore' services (services ex energy ex housing) looks like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.

Core goods prices (-0.3% MoM) fell for a second consecutive month, with declines concentrated in transportation (-0.5% MoM) – largely attributed to a 1.3% MoM pullback in used vehicle prices – education & communication goods (-1.2% MoM) and recreational goods (-0.8% m/m).

Subdued core CPI raises hopes that further Fed rate hikes are now off the table

The July CPI reading was another step in the right direction towards returning price stability. Core inflation matched June’s 28-month low of a ‘soft’ 0.2% MoM gain, which pushed the three-month annualized change down to just 3.1% – its first ‘three-handle’ since September 2021. Importantly, goods prices have again become a source of deflation, while price growth across non-housing services has slowed from last year’s peak of 6.7% to 4%.

The subdued core print is especially encouraging, as it raises hopes that further Fed rate hikes are now off the table. Markets are cognizant that another set of jobs and inflation data are due prior to the Fed’s next rate decision in September. There is also the small matter of the Jackson Hole symposium at the end of this month where markets get to hear from Fed Chair Powell. If the tier-one data for August continue to demonstrate that Fed policy tightening is having the desired effect of further subduing inflation, that should be cause for further rejoicing in the markets, as hopes for a “soft landing” will be fortified. However, should the inflationary pulse threaten to make a comeback in the world’s largest economy, that may force the Fed into yet another hike later this year, a decision that would further curtail risktaking in global financial markets.

With inflation trending favorably and the labor market showing early signs of cooling, the FOMC likely has the reassurance it needs to move to the sidelines and wait for the full effect of past tightening to work its way through the economy. However, with core inflation expected to run north of 3% through 1Q2024, rate cuts remain a long way out.

Source: BIMB Securities Research - 11 Aug 2023