Key TakeawaysInflation is forecast to rise moderately in July after an unexpected drop in June. A drop in gas prices in early July should keep headline inflation in check despite a rebound later in the month. Economists expect inflation to return to recent trends, among other key aspects of the report. Economists say prices at the pump fell in June, which should help limit the overall rise in inflation. But forecasters predict that the July report will show that upward pressure on prices will continue at a faster pace than Federal Reserve officials would like. For July, economists expect the CPI to rise 0.1% after falling 0.4% in June, according to FactSet consensus estimates. On an annual basis, economists forecast inflation will rise to 3.4%, slightly down from 3.5% in June. The core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% on the month and 2.5% from year-ago levels. The July CPI comes as analysts say the confusing July jobs report has economists expecting the Federal Reserve to put more emphasis on upcoming July and August inflation readings, particularly if they show further progress toward the central bank’s target inflation rate. Even as pricing pressures ease in some areas, Vanguard economist Adam Schickling expects some of June’s “unusually large declines” in several categories to return to recent trend levels in July. In general, “inflation has been harsher and more persistent,” he says. However, “we believe that it has a positive trend, gradually approaching [the Fed’s] 2% target.” Highlights from the July CPI Inflation Report CPI report release date and time: Wednesday, August 12 at 8:30 am ETCPI is forecast to rise 0.1% in July after declining 0.4% in June. Core CPI is forecast to rise 0.1% over the month after remaining stable in June. CPI is forecast to rise 3.4% after rising 3.5 % year-over-year in June Core CPI forecast to rise 2.5% after rising 2.6% from year-ago levels Gas prices wavered but should limit CPI rise Repercussions from Iran war continue to heavily influence overall monthly CPI swings During July, gas prices fell at the beginning of the month as oil prices declined on optimism about the end of the conflict. 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. His forecast calls for a “modest” 0.1% increase in the headline CPI and a 0.2% increase in the CPI excluding food and energy. Juneau wrote, Jefferey Roach, chief economist at LPL Financial, expects the CPI report to be “mixed.” He forecasts a 0.1% increase in the CPI from the previous month and an increase 3.4% year-on-year. It expects the core CPI to increase by 0.2% in June and 2.5% year-on-year. Durable goods, such as new and used cars, as well as financial services and insurance, could show some slowdown in their prices. However, high prices for fuels for transportation and healthcare cause some “disappointment.” 0.26% in core inflation. “The June data featured many atypical price changes, so it will be important to know the extent to which they will see the recovery,” the economists wrote there. “Within commodities, we will focus on recreational products and educational and communication products. The former appeared to be driven by outsized increases in subcategories like toys (+2.5%) and other video equipment (+7.7%), so we expect a negative recovery. That said, recent increases in memory chip prices could begin to add pressures on prices for these goods, as well as information technology commodities.” Economists at Goldman Sachs highlighted three areas in the July CPI report: “First, we expect mixed auto inflation, reflecting a 0.5% increase in used car prices, a 0.1% increase in new car prices, and a 0.5% drop in the category of automobile insurance. Secondly, we forecast benign readings for the accommodation categories (a 0.23% increase in the REA category and a 0.16% increase in the rental 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 headline CPI to rise 0.1% for the month and 3.3% from year-earlier levels. July’s weaker headline 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 will ease. will remain stable. After a very volatile housing market weighed down by price appreciation, he says that this sector is in a disinflationary trend that should persist for a couple of years. As a result, he expects the housing category to help core inflation remain low. In addition, Schickling says that rising wages are making basic services, except housing, more rigid, known as “super basic” inflation. “We see underlying price pressures that are persistent and we believe will remain, particularly with wages growing at 3.5%, even though productivity growth remains high,” he says. “We still don’t see much sign that core services inflation is improving on a material path.” July released last week highlighted the importance of the inflation outlook. Inflation remains above the Federal Reserve’s 2% target for the personal consumption expenditure index. Meanwhile, the overall economy appears healthy, raising expectations that the central bank will raise its federal funds rate target at least once before the end of the year from its current range of 3.50%-3.75%. question of flipping a coin versus keeping 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 driver. rates this year, but probably not longer. Vanguard’s Schickling says the July jobs report, combined with what he hopes is better inflation news, will strengthen the case for the Fed to remain on hold through the end of the year. “We expect the Fed’s focus is starting to shift toward a more balanced weighting of jobs and inflation data compared to six weeks ago, when inflation took center stage,” he says. “Our belief that the Fed will hold rates steady through the end of the year only. has increased in light of recent data releases.”
