• Inflation heated up in July as headline CPI prices rose 0.3% (month-on-month) as expected. Headline inflation picked up to 1.8% year-on-year  helped by a jump in energy prices.
  • Core prices were hotter-than-expected, rising 0.3% for the second consecutive month in July. As a result, the 12-month change firmed to 2.2% in July from 2.1% in June.
  • The strength in core inflation was broad-based, with increases in the indexes for shelter (+0.3% m/m), medical care (+0.5%), airline fares (+2.3%), household furnishings and operations (0.4%), apparel (0.4%), and personal care (+0.4%) all contributing. The index for new vehicles was one of the few to decline in July (-0.2%).
  • Zooming out, core services prices continued to show some heat (+0.3% m/m), and remained steady on a year-on-year basis at 2.8%. Core goods prices rose more modestly in July (+0.2% m/m), but it was the second straight month of prices increases for a category that is typically deflationary. Core goods inflation is now up 0.4% on a year-on-year basis, the strongest reading since 2012.

Key Implications

  • July’s inflation data shows that June’s firming in core prices was not a one-month wonder. The move suggests that the Fed’s preferred core inflation measure, core PCE, may also show signs of firming in July. However, core PCE inflation is typically a few ticks lower than CPI, so it is likely to still be right around the Fed’s 2% target.
  • It is likely no coincidence that prices for core goods have accelerated in the months since the White House raised the tariff rate to 25% on many imported goods. At the same time, a healthy economy is lifting prices for core services (up 3% annualized over the past 3 months), after temporary factors earlier this year held services inflation back.
  • From the Fed’s perspective, it will look through one-time price increases that are the result of the tariff increase (to the extent it is able to disentangle the effects of the tariffs versus generally rising prices due to a hot economy). Moreover, after years of underperforming their target, core inflation is likely not hot enough yet to have the Fed too concerned. Given the latest escalation in the China-U.S. trade war we still expect the Fed to make another insurance rate cut in September. However, today’s data is a reminder that inflation is not dead and suggests that the Fed may not cut as much in the months ahead as markets currently expect.


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.