CPI Watch: Will Inflation Continue to Rise?

Core CPI for July is expected to show a modest uptick, though it remains subdued, consistent with the ongoing disinflationary trend observed in recent months.

Analysts at Nomura and Morgan Stanley both predict a sluggish pace of core inflation, with core goods prices continuing to decline. This decline is driven by factors such as falling auto prices and extended retail discounts.

“Underlying inflation continues its gradual cooling, and this slowdown is likely to be more pronounced in July due to volatile components. We expect core goods and travel-related service prices to have fallen for the fourth consecutive month,” stated analysts at Nomura.

Although housing costs are expected to see a slight rebound, the broader trend still points toward disinflation.

Headline CPI is anticipated to edge up in July, largely due to rising energy prices. However, this increase is not expected to disrupt the broader disinflationary trajectory.

“We foresee more strength in services, mainly driven by a recovery in volatile categories such as hotels and airfares. We anticipate another low housing inflation figure,” noted analysts at Morgan Stanley.

Key Factors

• Core Goods: Continued weakness due to falling auto prices and ongoing retail discounts.
• Housing: Modest rebound in rents and Owners’ Equivalent Rent (OER), but the overall disinflationary trend persists.
• Energy: Rising gasoline prices expected to boost headline CPI.
• Car Insurance: A gradual downward trend is likely to continue.

Policy Implications

Both Nomura and Morgan Stanley expect the Federal Reserve to maintain its focus on labor markets while gradually easing monetary policy. The persistent disinflationary trend is likely to pave the way for rate cuts later in the year.

Outlook

While July’s CPI data may indicate a slight increase, the underlying trend remains disinflationary. Key components such as housing and core goods continue to show signs of weakness. As the Federal Reserve assesses its policy approach, the trajectory of core PCE inflation will be closely watched.