US CPI Preview: Modest Increase in July Amid Ongoing Disinflation

The Core Consumer Price Index (CPI) is expected to reflect a modest increase in July, continuing the trend of subdued inflation, signaling the ongoing disinflationary pattern observed in recent months. Financial analysts from Nomura and Morgan Stanley predict that core inflation will advance at a slow pace, influenced by a persistent decline in core goods prices, attributed to factors such as decreasing auto prices and prolonged 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 to fall for the fourth consecutive month," analysts at Nomura commented, highlighting the gradual cooling of inflation.

Despite a slight rebound anticipated in housing costs, the broader trend leans toward disinflation. The headline CPI for July is projected to edge higher, primarily driven by an uptick in energy prices. However, this is not expected to significantly alter the overarching disinflationary outlook.

Morgan Stanley analysts added, "We expect more services strength, mainly driven by payback in volatile categories such as hotels and airfares. We see another low housing inflation print."

Key Factors Influencing July's CPI:

• Core Goods: Continued weakness due to falling auto prices and ongoing retail discounts.
• Housing: A modest rebound in rents and Owners' Equivalent Rent (OER) is expected, yet the overall trend remains disinflationary.
• Energy: Higher gasoline prices are likely to lift the headline CPI.
• Car Insurance: A gradual downward trend is anticipated to persist.

Policy Implications:

Both Nomura and Morgan Stanley foresee the Federal Reserve maintaining its focus on labor markets while gradually easing monetary policy. The ongoing disinflationary trend could pave the way for potential rate cuts later in the year.

Outlook:

While July's CPI data may reflect a slight increase, the underlying trend remains disinflationary. Key components, including housing and core goods, continue to show signs of weakness. As the Federal Reserve fine-tunes its policy stance, close attention will be paid to the trajectory of core Personal Consumption Expenditures (PCE) inflation.

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