Core Services Inflation Recovers

Summary

• July CPI aligned with expectations.
• Core goods deflation deepened, partly due to used car prices.
• Shelter inflation remains at 0.5 MoM, a pace it has held since March.
• Core services ex shelter inflation recovered.

Market Implications

• Today’s data is consistent with the Fed staying on hold in September and hiking in November.

CPI Meets Expectations

July MoM headline and core CPI were 0.2%, in line with expectations and unchanged from June (Table 1). Core goods deflation deepened, OER were roughly unchanged from July, and core services ex shelter rebounded to roughly the same MoM increase as in May.

The Cleveland Fed YoY median price and core CPI slowed further while headline YoY CPI rebounded (Chart 1). 

Core Goods Price Inflation Higher Than Pre-Pandemic

Core goods inflation rebounded on the back of a rebound in used car prices (Chart 2).  Excluding used cars, core goods inflation slowed further, though it remains well above pre-pandemic prices. 

Used car price deflation deepened (Chart 3). Used cars have tracked Manheim auction prices more closely than the prices of new cars. The latest Manheim Market Report suggests consumers are buying more new cars, which suggests further downside for used car prices.

Shelter Inflation Not Slowing

OER remained close to 50bp MoM, the level it has been at since March. This aligns with rental and owned home vacancies that remain near historical lows (Chart 4). In addition, rental indices such as Zillow or Apartment List have been rising, which suggests limited downside to shelter costs (Chart 5).

Core Services Inflation ex Shelter Recovered

July core services ex shelter prices rebounded to 0.2% MoM, from no change in June. Health insurance costs fell 4.1% MoM due to CPI accounting conventions and airline fares fell 8% MoM. Car insurance increased 2% MoM and nursing homes 2.4%.

Over the longer run, core services inflation tracks wages closely. The stabilization of the Atlanta Fed median wage to 5.7% in July from 5.6% in June suggest downside to core services inflation could be limited (Chart 6).

Market Consequences

Today’s data is consistent with the Fed staying on hold in September and hiking in November. Inflation remains in a range consistent with the June SEP core PCE projection of 3.9% by Q4 2023. This suggests the Fed will stick to its plan of one more hike in 2023, likely in November since the Fed wants to hike more slowly.  

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

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