The published BLS report confirmed that inflation in the US in July increased again in annual terms for the first time in 12 months (3.2% YoY versus 3.0% YoY in June), which is due to the base effect. The result was slightly better than the consensus forecast (3.3% YoY).
Compared to the previous month, inflation maintained the June pace (0.2% mom), which coincided with the consensus forecast. Food prices have slightly accelerated growth, gasoline prices have slowed down, motor fuel and gas prices have accelerated. Core inflation (Core CPI), which does not include food and energy resources and is considered a more stable indicator of inflation, compared to the previous month maintained the same growth rate as in June (0.2% MoM), which also coincided with market expectations, but decreased slightly in annual terms to 4.7% (minimum since October 2021), while the market expected to remain at the June level of 4.8% YoY. The rental component continues to make an increasingly strong contribution to core inflation, but it is also gradually slowing growth. Also in July, car insurance became more expensive at a faster pace, prices for education and recreation services increased. On the other hand, the decline in car prices has accelerated, air transportation, medical services, and communication services have fallen in price.
The inflation data are generally close to expectations, and confirm a gradual, though not rapid disinflationary trend. It is still mainly due to lower prices for goods, while prices for services are more stable.
As J. Powell said at the last meeting, the dynamics of less volatile core inflation is more important for the Fed. Although it is still significantly higher than the target, a slight decrease (to 4.7% YoY) is rather a positive factor. But even more, the Fed would like to see a slowdown in the growth of prices for services (except housing), and this is happening slowly. Despite the restrictive level of the Fed rate (5.25-5.5%), the labor market remains very strong, with unemployment at a historic low (3.5%), but gradually the imbalance between supply and demand in the labor market is decreasing (job growth is slowing, the number of applications for unemployment benefits is growing, the ratio of the number of open vacancies to the number of unemployed), which gives hope for a "soft landing" of the economy (slowing inflation without a jump in unemployment and recession). Although we should not forget about the risks – both new inflationary shocks (a reversal in food prices), and the delayed negative reaction of the economy and the financial sector to the record rate of Fed rate hikes since the 80s.
Following the results of the last Fed meeting at the end of July, Powell said that the central bank's rate is already in the restrictive zone, which should eventually lead to a slowdown in inflation, and decisions on the need for further rate increases will be determined from meeting to meeting depending on economic data – so, at the meeting in September, the rate may be raised, but it may remain unchanged. Before the September Fed meeting, another report on the labor market and inflation will be released, but so far the data are in favor of the absence of the need for an additional rate hike, which was perceived by the market with optimism. The futures market increased from 86% to 90% the chances of keeping the Fed rate at the current level at the September meeting.
Annual inflation, which has been continuously declining for 12 months from the 40-year high reached last June (9.1%), increased slightly in July, which is due to the base effect. Nevertheless, it remained close to the 3% achieved a month earlier, and on a monthly basis the pace remained moderate (0.2% mom, as in June, which coincided with the consensus forecast).
Energy prices in July slowed to 0.1% MoM after 0.6% MoM in June, including the growth of gasoline prices slowed to 0.2% (1.0% in June), but the growth of motor fuel prices accelerated (+3.0% MoM) and natural gas (+2.0% MoM). In 12 months, gasoline in the United States has decreased in price by almost 20%, in general, energy resources – by 12.5%.
Food prices slightly accelerated growth (+0.2% mom, 4.9% YoY) after 0.1% mom in June. The price index for meat, poultry, fish and eggs increased by 0.5% in July, beef prices - by 2.4%.
Core inflation (excluding food and energy prices) it decreased in annual terms to 4.7% YoY (at least since October 2021) after 4.7% YoY in June, and in monthly terms maintained the growth rate of June (0.2% MoM), in line with market expectations. The main contribution to inflation (90%) is now made by "housing inflation" (shelter), with a delay reflecting the decline in market prices under new lease agreements. On a monthly basis, housing inflation is growing by 0.4% MoM for the second month in a row after 0.6% MoM in May, and on an annual basis it is 7.7% YoY. Against this background, in general, services (excluding the energy sector) maintain a fairly high monthly growth rate (+0.4%, even slightly accelerated from 0.3% MoM in June). In addition, the growth of car insurance prices contributed to the underlying inflation (price growth accelerated to +2% MoM after 1.7% MoM in June, in annual terms it is an impressive 17.8% YoY), the rise in the cost of educational services and recreation. Air transportation (-8.1% MoM), used cars (-1.3% MoM), new cars (-0.1% MoM), communication services (-0.1% MoM), medical services (-0.4% MoM) decreased in price.
The main components of inflation