EconoFACTS

August 14, 2024 | 09:52

July CPI Comes in Right Down the Pike

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

U.S. CPI inflation came in very close to expectations, increasing 0.2% m/m in July (+0.15% at the two decimal level) up from -0.1% m/m in June. This was third best monthly CPI inflation reading from the U.S. economy this year, but the largest increase since April. Nothing in today’s CPI report precludes a Fed rate cut in September, but it also doesn’t scream out for a panicked 50 basis point cut either. From a year ago, headline CPI inflation was below consensus, but in line with our forecasts at 2.9% down from 3.0% in June.

The report reveals that year-on-year consumer inflation remains on its downward path and is making further progress toward the Fed’s 2.0% goal on a sustained basis. S&P 500 equity futures prices were trading modestly higher on the news. Treasury bond yields are seeing a lift with the 2-year yield trading up 4.3 bps and the 10-year yield up 1.3 bps. The fed funds futures market is scaling back expectations for a bigger 50 basis point move (pricing in only a 48% chance of 50 basis points compared to 56% before the CPI release), but still solidifying around a cut at the September meeting.

The details of the report continued to show relative firmness in services (+0.3%), especially housing (+0.4%) inflation, though a number of major categories including energy (0.0%), new (-0.2%) and used vehicle (-2.3%) prices, apparel (-0.4%), air fares (-1.6%), medical care (-0.2%), and goods (-0.1%) prices all continued to drop. This dovetails nicely with anecdotal reports from retailers that consumers are becoming more price-sensitive, searching for bargains and, in some cases, scaling back on purchases or trading down to lower-priced substitutes. The BLS noted that 90% of the monthly increase in July came from the shelter component.

Core CPI inflation, excluding food and energy, increased a moderately tame 0.2% last month (+0.17% at the two decimal level), not much different from the prior two months. From a year ago, core CPI inflation slipped by tenth of a percentage point to 3.2% from 3.3%. The three-month moving averages of the core and super-core CPI inflation rates are looking much better, slipping to 1.6% annualized on the core and 0.4% on the super-core.

Bottom Line: The CPI inflation report for July was a bit of a mixed bag with relatively firm services and housing inflation, but continued signs of weakness in consumer discretionary categories including air fares and vehicle purchases. Overall, this report shows continued progress towards the Fed's inflation goals, and encouraging hints that inflation could moderate further with services and housing inflation always expected to lag the weakness we are already seeing in discretionary goods prices. Nothing in this report would keep the Fed from cutting in September, but market hopes for a bigger cut still seem like a long shot.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics