CPI: Cooler Readings As Trend Starts To Decelerate

Bottom Line: CPI was flat in July as energy prices tumbled, and even the core reading was lower than expected at just 0.3%, easing the trend rate of core inflation back below 4%. At the core level, used car prices fell, while new vehicle prices continue to rise. Airfares, while a much smaller contribution to the index, were down sharply, nearly 8% lower on the month. Communications prices, mostly cell phone services, were lower too. Owner's Equivalent Rent (OER), a key measure of shelter prices and nearly a third of core CPI, barely decelerated, though, holding near its fastest pace in this cycle, annualizing at over 7% in the last three months. OER historically lags home price moves by over a year, and we expected the acceleration to ease only very slowly over the balance of the year and in early 2023. Medical care services prices, the largest contributor to volatility before the pandemic, decelerated slightly but remained a major source of higher trend core inflation. Overall, while consumers saw some welcome relief in energy prices and even core inflation in July, it is too early to call the end of inflation. Expect core inflation readings to remain historically high for a few months until high goods inventories and smoother supply chains start to put downward pressure on prices in the 4th Quarter, just as the lagged impact of housing prices on OER starts to become a source of deceleration on core CPI.

The CPI FELL by 0.02% in July, compared with market expectations for an increase of 0.20%.Food prices increased by 1.10% while energy prices fell by 4.6%.  Prices for gasoline fell by 7.7% while prices for fuel oil declined by 8.1%, prices for electricity climbed by 1.6%, but prices for natural gas fell by 3.6%.  Energy prices are now 32.9% ABOVE their year-ago level.  Overall consumer prices are now 8.5% ABOVE their year-ago level; in July 2021, consumer prices were 5.3% ABOVE their year-ago level.
 
The Core CPI ROSE by 0.31%, compared with market expectations for an increase of 0.50%.  Prices for commodities excluding food and energy commodities rose by 0.2%. Gains in new vehicles (+0.6%), medical care (+0.6%),  were offset by declines in used cars & trucks (-0.4%), apparel (-0.1%). Prices for services excluding energy services rose 0.4%, with a moderate increase in owner's equivalent rent (+0.6%), shelter (+0.5%), and medical care services (+0.4%). Core consumer prices are now 5.9% ABOVE their year-ago level; in July 2021, consumer prices were 4.2% ABOVE their year-ago level.