Consumer Price Index Insights for July

The consumer price index (CPI) data for June surprised to the downside, but some of that surprise should reverse in July, according to Bank of America economists in a Thursday note.

CPI Expectations

Economists forecast a headline CPI increase of 0.3% month-over-month, driven mainly by a pickup in core services inflation and energy prices. This would keep the year-over-year rate steady at 3.0%, with the NSA index projected at 314.993.

They also expect core CPI to rise by 0.2% month-over-month.

“While this is not quite as low as June, it aligns with the prior trend in deflation and should meet the Fed’s benchmark for beginning rate cuts in September,” noted the economists.

The modest reversal in core CPI compared to last month is attributed to core services inflation.

Factors Influencing Core Services Inflation

According to BofA, two key factors influence this:
1. Core services, excluding rent and owners’ equivalent rent (OER), declined in June mainly due to a sharp drop in airfares. However, for July, they expect airfares to decline more moderately at -1.0%.
2. Shelter prices are anticipated to rise by 0.3%, with lodging away from home increasing by 0.8% month-over-month. The deceleration in rents and OER is expected to hold steady at 0.3%.

In summary, BofA expects core services to rise by 0.3% month-over-month. While non-housing services inflation may moderate over time due to cooling wages, a prolonged period of deflation is deemed unlikely.

Overview of Shelter and Core Goods Prices

Last month’s deceleration in shelter was somewhat surprising but not unexpected. BofA had previously forecasted rents and OER to decelerate in August.

“We believe this signal is significant and expect the deceleration to persist,” they stated.

Forecasts indicate modest firming, leading to a 0.3% month-over-month rise for both components.

“Consistent 0.3% month-over-month increases in shelter should bolster the Fed’s confidence that inflation is moving toward the 2% target,” the BofA team continued.

In addition to services, core goods prices are projected to decline for the fifth consecutive month, partly due to further reductions in vehicle prices.

Conclusion

If the July CPI report aligns with expectations, economists maintain that the Fed will likely initiate its rate-cutting cycle in September, anticipating 50 basis points in cuts this year.

While financial markets are pricing in more than 100 basis points in cuts this year, with discussions about the potential for larger upfront cuts or intermeeting moves, BofA does not believe the current circumstances justify such action.