Summary: US CPI increases by 0.5% in July, in line with expectations; “core” rate up 0.3%, less than expected figure; some moderation but “pace remains strong”; “much of re-opening pressure now abated”; “Services less energy services” category main driver of headline rise; New York Fed Reserve July UIG posts annual rate of 3.7%.
The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March of this year.
The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.5% on average in July. The result was in line with expectations and just over half June’s 0.9% rise. On a 12-month basis, the inflation rate remained unchanged from June’s seasonally adjusted reading of 5.3%.
“While showing some moderation from June, the pace remains strong. The surge in airfare and vehicle prices appears to have peaked, but many other components are showing persistent strength,” said Westpac economist Lochlan Halloway.
NAB senior economist Tapas Strickland took a different view. “Much of the re-opening pressure has now abated with lodging away from home and airfare prices back to their pre-pandemic levels, while used car values which leads used car prices have dipped for two consecutive months…”
US Treasury bond yields fell on the day. By the close of business, the 2-year yield had shed 3bps to 0.21%, the 10-year yield had lost 2bps to 1.34% while the 30-year yield finished 1bp lower at 2.00%.
In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. August 2022 futures contracts implied an effective federal funds rate of 0.14%, 4bps above the spot rate.
The largest influence on headline results is often the change in fuel prices. In July, “motor fuel” prices increased by 2.4% on a seasonally adjusted basis, adding 0.09 percentage points to the total change for the month. However, “Services less energy services”, the category which contains shelter costs, was the main driver of the result, adding 0.18 percentage points to the headline measure.
The Federal Reserve Bank of New York publishes an unofficial estimate of underlying inflation, known as the Underlying Inflation Gauge (UIG) and it was updated at the same time as the CPI figures. While the Federal Reserve states the UIG does not represent an official estimate, the UIG does appear to lead the core CPI measure. July’s UIG registered an annual rate of 3.7%, slightly higher than June’s figure of 3.6%.
