An early-July decline in gas prices should keep a lid on overall inflation despite a bounce later in the month.
On an annual basis, economists forecast inflation will post a 3.4% increase, down slightly from 3.5% in June.
Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% for the month and 2.5% from year-ago levels.
Their forecast calls for a “modest” 0.1% increase in the overall CPI and a 0.2% increase for the CPI excluding food and energy.
Core CPI Inflation Likely a ‘Mixed Bag’ in JulyOutside of volatile energy prices, “core goods inflation should remain subdued, but core services likely rebounded to more trend-like levels after the June decline,” Bank of America’s Juneau wrote.
Key Takeaways
Inflation is forecast to rise moderately in July after an unexpected decline in June.
An early-July decline in gas prices should keep a lid on overall inflation despite a bounce later in the month.
Economists expect inflation to return to recent trends, among other key aspects of the report.
Economists forecast the July Consumer Price Index Report will show a rebound in inflation following a surprising decline in June. Economists say prices at the pump fell on balance in June, which should help limit the overall rise in inflation. But forecasters predict the July report will show upward pressure on prices continuing at a faster pace than Federal Reserve officials would like.
For July, economists expect CPI to increase 0.1% after dropping 0.4% in June, according to FactSet consensus estimates. On an annual basis, economists forecast inflation will post a 3.4% increase, down slightly from 3.5% in June. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% for the month and 2.5% from year-ago levels.
The July CPI comes as analysts say July’s muddy jobs report has economists expecting the Federal Reserve to place greater emphasis on upcoming July and August inflation readings, particularly if they show further progress toward the central bank’s ideal inflation rate.
Even as price pressures ease in some areas, Vanguard economist Adam Schickling expects some of June’s “unusually large declines” across several categories to return to recent trend levels in July. Overall, “inflation has been stickier and persistent,” he says. However, “we think it is trending in a positive direction, moving gradually closer toward [the Fed’s] 2% target.”
July CPI Inflation Report Highlights
CPI report release date and time: Wednesday, Aug. 12, at 8:30 am ET
CPI is forecast to rise 0.1% in July after decreasing 0.4% in June.
Core CPI is forecast to increase 0.1% for the month after remaining flat in June.
CPI is forecast to rise 3.4% after increasing 3.5% year over year in June.
Core CPI is forecast to increase 2.5% after rising 2.6% from year-ago levels.
Gas Prices Seesaw but Should Limit CPI Increase
The ripples from the Iran war continue to heavily influence monthly overall swings in the CPI. During July, gas prices fell early in the month, as oil prices declined on optimism about an end to the conflict. By month’s end, energy prices were on the upswing again as fighting resumed. But on net, gas prices should show a 2% to 3% decline in the CPI, economists say.
“Oil volatility persisted throughout July, with uncertainty over traffic through the Strait of Hormuz. This helped drive prices at the pump higher in the second half of July. However, average prices were still down compared to June,” Bank of America economist Stephen Juneau wrote. Their forecast calls for a “modest” 0.1% increase in the overall CPI and a 0.2% increase for the CPI excluding food and energy.
Core CPI Inflation Likely a ‘Mixed Bag’ in July
Outside of volatile energy prices, “core goods inflation should remain subdued, but core services likely rebounded to more trend-like levels after the June decline,” Bank of America’s Juneau wrote.
LPL Financial chief economist Jefferey Roach expects the CPI report to be a “mixed bag.” He forecasts a 0.1% increase in the CPI from the previous month and a 3.4% rise year over year. He expects Core CPI to increase by 0.2% in June and by 2.5% annually. Durable goods, such as new and used cars, as well as financial services and insurance, could show some price deceleration. However, healthcare and high transportation fuel prices cause some “disappointment.”
At Deutsche Bank, the forecast calls for a 0.15% increase in the overall CPI and a 0.26% increase in core inflation. “The June data featured many outlier price changes, so the extent to which they see payback will be important,” economists there wrote. “Within core goods, we will have our eye on recreation commodities and educational and communication commodities. The former seemed to be driven by outsized increases in subcategories like toys (+2.5%) and other video equipment (+7.7%), so we are looking for some negative payback. That being said, recent increases in memory chip prices could begin to add price pressures to these goods, as well as for information technology commodities.”
Goldman Sachs economists highlighted three areas in the July CPI report: “First, we expect mixed autos inflation, reflecting a 0.5% increase in used car prices, a 0.1% increase in new car prices, and a 0.5% decline in the auto insurance category. Second, we forecast benign readings for the shelter categories—a 0.23% increase in the OER category and a 0.16% increase in the rent category—reflecting the continued slowdown in their underlying trends. Third, we expect mixed travel services categories (airfares: +2.0%; hotels: -1.0%).”
Vanguard’s Schickling expects overall CPI to rise 0.1% over the month, and 3.3% from year-ago levels. July’s softer overall inflation reading reflects the gradual decline in oil prices and the stabilization of core goods and housing costs, he says. He predicts core goods inflation to come in flat. Coming off a very volatile housing market burdened by price appreciation, he says this sector is on a disinflationary trend which should persist for a couple of years. As a result, he expects the housing category to help core inflation stay lower.
Additionally, Schickling says rising wages are making for stickier core services ex-housing, known as “supercore” inflation. The category that tracks services in healthcare, transportation, and more (excluding food and energy) showed no change in June but is still up 3.2% over the year. “We see underlying price pressures that are persistent, and think they’re going to stick around, particularly with wages growing at 3.5%, even though productivity growth is still high,” he says. “We don’t yet see many signs that core services inflation is improving at a material trajectory.”
Inflation Data Looming Large For Fed Outlook
Economists say the inconclusive July jobs report released last week raised the importance of the inflation picture. Inflation remains above the Fed’s 2% target for the Personal Consumption Expenditures Index. Meanwhile, the overall economy appears healthy, leading to expectations that the central bank will raise its federal-funds rate target at least once by year-end from its current range of 3.50%-3.75%.
Bond traders see the odds of a quarter-point September interest rate increase as essentially a coin toss vs. holding rates steady, according to the CME FedWatch tool. However, traders give a roughly 80% chance that the Fed will raise rates at least once, if not twice.
LPL’s Roach says the path for rate hikes will depend on how long inflation remains elevated. With the labor market slowing, inflation could become the Fed’s key swing factor. He says a muddier inflation picture could warrant one rate hike this year, but likely no more.
Vanguard’s Schickling says the July jobs report, combined with what he expects will be improved inflation news, will strengthen the case for the Fed staying on hold through year-end. “We expect the Fed’s focus is starting to shift to a more balanced weight of labor and inflation data vs. six weeks ago, when inflation was front and center,” he says. “Our conviction in the Fed holding rates constant through year-end has only grown in light of recent data releases.”
