US Economics: Just the start of softer core CPI

Research evidence excerpt

US Economics: Just the start of softer core CPI

e impacted by measurement issues resulting from last

year’s government shutdown. A 0.15% increase in primary rents and 0.24% OER are

on the softer side of a pre-pandemic average pace of shelter inflation. Our forecast

includes similar readings for shelter inflation in coming months as ~1.5 years of soft

home prices and new market rents should translate to slowing consumer shelter

inflation with a lag.

Goods prices remain modest, with few signs of pass-through from higher energy

costs. Of course, this remains an upside risk and data through the summer and

early fall will likely still be scrutinized for any energy price impact. In our base case,

the pass through to core inflation remains very limited. Over the next few months,

the initial increases in goods prices from tariffs last year will also start to drop out

of annual readings, implying annual goods inflation could remain soft. We continue

to see downside risks to prices like apparel which had been surprisingly strong early

this year.

Very weak core services inflation was largely due to another decline in motor

vehicle insurance which fell 2% in June after falling 1.7% in May. At 3.3% of core CPI,

we have been highlighting that downside risks to this component could be material

for further slowing in CPI. We would not expect such large declines, but

importantly, motor vehicle insurance does not enter PCE inflation in the same way

and this component will not weigh on core PCE.

Weakness in services was not just concentrated in motor vehicle insurance,

however, with soft medical services and falling hotel prices after recent strength,

which we expect to continue in coming months. Wireless telephone services fell