Core CPI is expected to show a modest increase in July but remain subdued overall, reflecting the ongoing disinflationary trend.
Nomura and Morgan Stanley both anticipate a slow pace of core inflation, with core goods prices continuing to decline due to factors like falling auto prices and extended retail discounts.
“Underlying inflation continues to cool gradually, and this slowdown is likely to be amplified by volatile components in July. We expect core goods and travel-related service prices fell for the fourth consecutive month,” said analysts at Nomura.
While housing costs are expected to rebound slightly, the overall trend is toward disinflation.
Headline CPI is projected to increase slightly in July, primarily driven by higher energy prices. However, this is not expected to alter the broader disinflationary picture.
“We expect more services strength, mainly driven by payback in volatile categories such as hotels and airfares. We see another low housing inflation print,” said analysts at Morgan Stanley.
Key Factors
Core goods: Continued weakness due to falling auto prices and extended retail discounts.
Housing: Modest rebound in rents and OER, but overall disinflationary trend persists.
Energy: Higher gasoline prices to boost headline CPI.
Car insurance: Gradual downward trend expected to continue.
Policy implications:
Both Nomura and Morgan Stanley anticipate the Federal Reserve to maintain its focus on labor markets while gradually easing monetary policy. The persistent disinflationary trend is likely to support rate cuts later in the year.
Outlook:
While July's CPI data may show a slight uptick, the underlying trend remains disinflationary. Key components such as housing and core goods continue to exhibit weakness. As the Federal Reserve navigates its policy stance, the path of core PCE inflation will be closely monitored.