July’s core inflation meets expectations after two successive months of downside misses. The 0.2% MoM growth seen across headline and core prices marks a rebound from June’s soft set of prints, reinforcing our call for 25bps of Fed easing in September.
We think this latest data lands in the sweet spot for the Fed – strong enough to allay fears of a more troubling economic slowdown that could have required more aggressive easing next month, but still soft enough to see increased confidence amongst Fed voters that inflation is sustainably returning to target. With this in mind, we continue to take a sceptical view of market pricing that suggests material risk of a 50bp cut next month.
The Fed should instead cut rates by 25bps in September, November and December.
Putting today’s data under the microscope, the unrounded headline CPI rose by 0.155% MoM, barely squeaking over the line to meet expectations for a 0.2% print. Similarly, core CPI grew by 0.165%, up from 0.065% in June to just about match consensus predictions. The Fed’s preferred measure of underlying price growth, meanwhile, which also excludes most shelter components from core inflation, rebounded to 0.21% MoM in July after printing at -0.04% and -0.05% in May and June respectively. Even so, supercore still dropped to 0.47% on a 3mma annualised basis, down from 1.4% prior, pointing to a modest further weakening in inflation momentum.
Where there were some signs of strength in today’s inflation report, shelter continues to be the standout category.
After slowing last month, owner’s equivalent of rent increased by 0.36% MoM in July, while primary rents rose 0.49% – up from 0.27% and 0.26% respectively in June, landing above expectations in both cases. This strength was largely balanced in July by core goods, where prices fell by -0.32% MoM, largely stemming from a -2.3% decrease in used car prices. In any case, the lagged response of shelter relative to the rest of the consumption basket should see the FOMC remain relatively unconcerned by this month’s uptick, with the long-term trend still pointing to further disinflation in the pipeline.
All told then, today’s data shows that price growth continues to cool, which should see building confidence amongst the FOMC that the time for rate cuts has now arrived.
It does not, however, give an indication the US economy is about to crash land, as some have suggested in recent weeks. This latter eventuality remains partially priced into market expectations, with swaps projecting a one-in-three chance of a 50bp cut from the FOMC in September, only modestly lower than pre-release. To us, this looks overly dovish considering today’s data. As such, barring a major downside surprise in the August CPI report, due to be released just before the Fed’s September policy meeting, we expect the FOMC to cut by just 25bps next month. If correct, then all else being equal we think this would warrant the dollar trading 1-1.5% stronger than current levels in the coming weeks.
Measures of underlying inflation continue to cool, opening the door to Fed rate cuts, but not by enough to suggest that 50bps of easing should be a serious consideration for the FOMC next month
