What To Expect From The July CPI Report

The upcoming Consumer Price Index report on July 12 is expected to show core inflation remaining well above the Federal Reserve’s 2% annual goal to the month of June, motivating a probable further rate hike on July 26.

In addition, the disinflation that we’ve seen over the past 12 months in goods, notably energy, may be starting to taper. However, shelter costs will be closely watched as declining prices here could prompt further disinflation given the large weighting to shelter in the CPI series.

It’s expected that headline inflation will come in lower than core inflation, which strips out food and energy costs. The Fed prefers to look at the latter measure as a better estimate of underlying inflation trends.

Nowcasts

Nowcasts from the Federal Reserve Bank of Cleveland estimate that CPI inflation will come in at over 0.4% for the month of June 2023. That’s a relatively high level, broadly implying an annualized 5% level of inflation.

However, headline CPI may come in at a 3.2% annual rate as strong inflation from last summer rolls off the 12-month series. In constrast core inflation may come in at 5.1% on these nowcast estimates. That’s largely because the benefits from falling energy costs over the past year, are excluded from the core CPI series, but have helped lower headline inflation.

If this nowcast broadly holds, then the Fed’s fundamental take away is likely to be that core CPI of over 5% is well above their 2% goal and further hikes may be warranted, especially at a time when the job market remains strong, though we’ll learn more there with the release of the Jobs Report for the month of June on July 7.

What To Look For

The Fed will be especially focused on service inflation within the CPI report. The Fed is comfortable that goods prices have eased from peak levels and that housing costs are likely to fall in future in the CPI series. That leaves services costs are the Fed’s key concern. Services prices are generally linked to wages, and wages have been rising at a fast pace recently, albeit with some recent signs of easing from peak levels. For example, the Atlanta Fed’s Wage Tracker currently has wages rising at a 6% annual rate as of their most recent May estimate. That’s too high for the Fed. Without a clear signal that services prices are no longer increasing rapidly the Fed is unlikely to back down from its fight against inflation based on recent statements from officials.

Housing, or shelter, costs will also be closely monitored by the Fed. There’s a broad expectation that these costs, which have been rising in price at around an 8% annual rate will start to come down and perhaps contributing to lower overall inflation. That said, we haven’t seen that trend too clearly in the CPI data yet. To the extent we do that, it may offer some encouragement to the Fed that both core and headline CPI inflation will trend lower into 2024.

PCE Inflation

Even though the CPI release is earlier in the month, the Fed often prefers to look at Personal Consumption Expenditure Inflation as their key metric for U.S. consumer price trends. For May, that came in at a 3.8% annual rate, and 4.6% when food and energy prices are removed. We won’t see another update on PCE inflation until July 28, which is after the Fed’s next meeting and so CPI inflation will be the primary consumer inflation data point for June as the Fed next sets rates. Note that we’ll also see an update on Producer Prices on July 13, though this series, with its focus on wholesale pricing, is of secondary importance to the Fed.

It’s likely CPI inflation tells a similar story to recent months with inflation well down from peak levels, but still not close enough to 2% for the Fed to be satisfied. That’s why the Fed contemplates further rate hikes at upcoming meetings.