The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in July, bang-on the consensus forecast. On a 12-month 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.
- In contrast, energy costs had a much smaller effect on July’s gain – rising a very modest 0.1% m/m – as higher gasoline prices (0.2% m/m) were partially offset by lower electricity (-0.7% m/m) costs. Meanwhile, food prices rose 0.2% m/m and slowed to 4.9% year-on-year (y/y).
Excluding the direct effects of food and energy, core inflation rose 0.2% m/m (0.16% m/m unrounded) – matching June’s gain – and also meeting the consensus forecast. The 12-month change on core edged lower by 0.1%-pts on the month, falling to 4.7%.
- Price growth across services rose 0.4% m/m – a slight acceleration from June’s 0.3% m/m gain – and remain at an elevated 6.1% on a year-on-year basis.
- Shelter costs remained a key source of inflationary pressure, with owners’ equivalent rent (0.5% m/m) and rent of primary residence (0.4% m/m) notching sizeable gains.
Price growth across non-housing services rose a modest 0.1% m/m – an acceleration from June’s decline of 0.1% m/m – with gains seen across recreation services (+0.8% m/m) as well as education (+0.3% m/m) and transportation (+0.3% m/m). Airfares continued to tumble, with prices down a sizeable 8.1% m/m – exactly matching June’s decline.
Core goods prices (-0.3% m/m) fell for a second consecutive month, with declines concentrated in transportation (-0.5% m/m) – largely attributed to a 1.3% m/m pullback in used vehicle prices – education & communication goods (-1.2% m/m) and recreational goods (-0.8% m/m).
Key Implications
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% m/m 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%.
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 Q1-2024, rate cuts remain a long way out.
