• US CPI surprised lower for a change…
  • …and markets may be prematurely judging Fed implications in August trading
  • US CPI, m/m SA // y/y % change, July:
  • Actual: 0.0 / 8.5
  • Scotia: 0.4 / 8.9
  • Consensus: 0.2 / 8.7
  • Prior: 1.3 / 9.1
  • US core CPI, m/m SA // y/y % change, July:
  • Actual: 0.3 / 5.9
  • Scotia: 0.6 / 6.1
  • Consensus: 0.5 / 6.1
  • Prior: 0.7 / 5.9

US CPI inflation surprised lower for a change. That prompted out-sized movements in markets because a) the Fed has conditioned markets to attach excessive importance to every backward-looking data wiggle, b) markets have adapted to positioning toward persistent upside surprises and had to quickly cover, and c) it’s August! Being August, this recap will be short.

US 2s rallied by about 17bps and 10s rallied by about 7bps in a bull steepener move. S&P 500 futures took off by about 1¼%. The dollar depreciated by about ¾% on a DXY basis.

In my view, it’s premature to judge whether the Fed’s next move in September will be a 50 or 75 point hike given that we’ll get one more PCE reading which is the Fed’s preferred measure, one more CPI print and another jobs report before then plus the fact that September often carries its own surprises along the way. At this point, I think a reasonable perspective would lean heavily against the view that one softish CPI print would dissuade the Fed’s hawks. They may trade-off the one CPI downside surprise against the ongoing tightening in the US job market and concern that wage pressures present the risk of more persistent inflation. In any event, I continue to think we’re dealing with longer wave forces and it’s silly to think one inflation reading settles anything.

Core CPI was up by just 0.3% m/m which was softer than expected and ends or at least suspends a string of firmer readings that often surprised higher (chart 1). Headline CPI was weaker than expected partly because of core but also because gasoline prices fell by more than anticipated in seasonally adjusted terms (-7.7% m/m). 

Chart 1: US Core CPI Inflation

Among the uncertainties is whether core PCE will follow core CPI on August 26th given that the two readings have not been tracking each other very well for some time (chart 2).

Chart 2: US Core PCE and CPI Inflation

High contact service prices played a role in explaining the softish core CPI reading. Airfare fell by 7.8% m/m, intercity transportation fell 0.3% m/m and lodging away from home fell 2.7% m/m.

New vehicle prices were up 0.6% m/m but used vehicles fell 0.4% for what is roughly a net wash in terms of overall vehicle prices.

Owners’ equivalent rent was up 0.6% m/m which remains in line with the trend. Rent remains hot at 0.7% m/m.

Charts 3–6 break out drivers and please see the more detailed accompanying table.

Chart 3: July Changes in US Headline CPI Categories; Chart 4: July Weighted Contributions to Monthly Change in US Headline CPI
Chart 5: July 12-Month Changes in US Headline CPI Categories; Chart 6: July Weighted Contributions to the 12-Month Change in US Headline CPI
Table 1 of 3: US CPI Basket Decomposition
Table 2 of 3: US CPI Basket Decomposition
Table 3 of 3: US CPI Basket Decomposition