The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in July, bang-on the consensus forecast. On a twelve-month basis, CPI fell to 2.9% (from 3.0% in June).
- After exerting a measurable drag in each of the two prior months, energy prices were largely flat in July. Food prices matched last month’s gain, rising 0.2%.
Excluding food and energy, core prices rose 0.2% m/m, a modest acceleration from June’s very soft monthly gain of 0.06%. The twelve-month change on core slipped by a tenth of a percentage point to 3.2% – the slowest pace of growth in over three years – while the three-month annualized rate of change fell to 1.6%.
Core services advanced a bit faster in July, rising by 0.3% m/m, and were entirely responsible for the uptick in headline inflation.
- Shelter costs ticked higher by 0.4%, or roughly double the pace of growth seen in June and accounted for 90% of the monthly gain in headline CPI. Last month’s uptick in shelter costs were roughly in-line with the monthly gains averaged over the past twelve-months.
- Meanwhile, non-housing service inflation (aka ‘supercore’) rose by a soft 0.2% (0.15% unrounded) – an acceleration from last month’s modest pullback – thanks to an uptick in motor vehicle insurance (+1.2%), recreational services (+0.4%) and ‘other’ personal services (+0.3%).
Core goods prices fell by 0.3% on the month, largely due to a further decline in new (-0.2%) and used vehicle prices (-2.3%). Goods prices have been flat or have registered a decline in each of the last 14 months.
Key Implications
Despite the uptick in monthly readings for both headline and core inflation, price pressures remained relatively subdued in July. Nearly all of last month’s gain can be attributed to higher shelter costs, which carry a much smaller weight in core PCE inflation – the Fed’s preferred inflation metric. Moreover, goods prices continued to edge lower, while the uptick in ‘supercore’ was relatively mild – rising at just half the clip averaged over the prior twelve-months. As a result, near-term trends on core inflation continued to edge lower, with the three-month annualized rate of change pushing below 2%.
With the labor market showing clear signs of cooling and inflationary pressures subsiding, the Federal Reserve can confidently start to dial back its policy rate in September. As noted in our recently published Q&A, we expect three quarter-point rate cuts from the Fed by year-end.
