- Core CPI posted a modest gain...
- ...as core services CPI ex-housing flat lined...
- ...and core goods CPI slipped
- Markets continue to price a July Fed hike, slightly lower terminal rate
- There remains translation risk into core PCE
- US CPI / core CPI, m/m %, SA, June:
- Actual: 0.2 / 0.2
- Scotia: 0.3 / 0.3
- Consensus: 0.3 / 0.3
- Prior: 0.1 / 0.4
- US CPI / core CPI, y/y %, SA, June:
- Actual: 3.0 / 4.8
- Scotia: 3.1 / 5.0
- Consensus: 3.1 / 5.0
- Prior: 4.0 / 5.3
US core CPI inflation landed weaker than expected and continued an ebbing trend under the hood. There is translation risk into the core PCE measure that matters more to the Federal Reserve, but it still leans in the direction of at least a temporary pause in inflationary pressures. There is the added caution that markets have been fooled by soft patches before.
Markets reacted by driving the two-year Treasury yield another 8+bps lower to add to the modest pre-data decline. The dollar weakened a little further and S&P equity futures rallied a touch. Markets continue to price a 25bps hike on July 26th but lowered terminal rate pricing by 2–3bps to price only part of an extra 25bps hike before year-end.
CPI ex-food and energy only tells a part of the story, but at 0.2% m/m SA it was on the weaker side of consensus and hence the year-over-year core measure pulled back to 4.8% (5% consensus, 5.3% prior). The annualized m/m core CPI was only 1.9% which is the weakest inflationary pressure at the margin since February 2021 and that demonstrates that the recent softening isn’t just a base-effect driven deceleration in the year-over-year rate (chart 1).
Key is that the twin trimmed-up core CPI gauges were soft again. Core services CPI ex-housing was flat and has been on an extended decelerating trend (chart 2). Goods CPI ex-food and energy fell by -0.1% m/m SA which indicates soft goods price changes (chart 3).
Shelter inflation eased to 0.4% m/m from 0.6% prior with OER up 0.4% from 0.5% prior. As chart 4 depicts, housing as captured in CPI is on an ebbing trend at the margin.
Used vehicle prices were well off industry guidance, down -0.5% m/m SA. New vehicles were in line with industry guidance for no change. Chart 5.
Food prices were little changed at +0.1% m/m with groceries flat and 'away from home' such as take out up 0.4%. Chart 6.
Energy prices were up 0.6% with gasoline up 1% m/m SA.
I’m not sure what’s going on with airfare despite all the industry talk, but it was down another 8.1% m/m from -3% prior and -2.6% the month before that for a significant and extended decline. Chart 7.
Charts 9 and 10 on the next page show the m/m % changes in CPI by components in unweighted terms and in terms of weighted contributions to the overall 0.2% m/m change in headline CPI.
Charts 11 and 12 two pages ahead do likewise for the y/y changes.
A residual caution is that what happens to core CPI may not happen to core PCE, or at least not perfectly so. Core PCE has a much lower weight on shelter than core CPI, for instance, and so the deceleration in housing shouldn’t be as big of a contributor to the downside in core PCE.
A way of demonstrating this point beyond just showing deviations in core PCE and core CPI over time is chart 8 below. Underlying core services CPI ex-housing can significantly deviate from core PCE services ex-housing with one reason being PCE’s lower much lower weight on housing than CPI.
Please also see the accompanying table at the back of this note that shows more detail including micro charts and z-score measures of deviations from trend.
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