By Senad Karaahmetovic
In the August CPI preview note, A Morgan Stanley economist argues that sequential headline CPI will likely turn negative in August. The bank’s forecast sits at -0.23%, which calls for a bigger-than-expected given the consensus is at -0.1%.
The August CPI report will likely prove to be a “sharp turnaround” compared to June, the economist told clients in a note.
“Core inflation is likely to remain in line with last month's moderate pace (0.34% MSe vs 0.3% cons), notching only minimal reacceleration after last month's 0.31% mom reading,” the economist said.
Morgan Stanley sees headline inflation dropping to 7.9% while base effects continue to push core inflation higher. The economist sees core hitting 6.1% YoY and expects it to peak in September.
“Energy prices should be even more of a drag on headline inflation in August than they had been in July. On the month, we expect energy prices to decline 6.4% after an already-hefty decline of 4.6% last month,” the economist added.
On a more negative note, MS economists expect rent inflation to remain “strongly elevated for some time,” which should be on the Fed’s course of action.
“Rental inflation is likely to decline only very slowly over the coming months,” the economist also noted.
Net-net, analysts see shelter inflation falling in the next 6-12 months, although at a slow pace.
As far as the FOMC meeting in September is concerned, the economist expects “a very close decision between a 50 and a 75bp rate hike.”