5 Things July CPI Tells Us

Here are 5 things to look at in the July CPI Report to understand the effect of tariffs:

  1. Headline CPI rose +0.3% M/M, in line with expectations, though the Y/Y rate firmed by more than expected, to 1.8% from 1.6% (consensus 1.7%). The core metrics rose by 0.3% M/M, a quicker pace than the 0.2% expected, but matching the prior; the Y/Y rate also rose by more than expected, to 2.2% against an expected unchanged 2.1%). Real weekly earnings fell by 0.3% M/M in July, against the previous +0.2%.
  2. Pantheon Macroeconomics notes that the overshoot was due to gains in used car prices, medical services and airline fares, as well as tobacco and apparel. Rents were subdued, but Pantheon sees no reason to expect a fundamental slowing, given the very low vacancy rate and rising wages.
  3. “After four straight core CPI increases of less than 0.15% per month, two straight 0.29% gains are more likely to be just a rebound rather than the start of a sustained trend, the consultancy says, “thats almost certainly the case with used auto prices, which plunged in the first few months of the year but are now rebounding.”
  4. However, the increases in other components may persist, due to rising labour costs and tariffs: “The upturn in medical services inflation, where the Y/Y rate has risen to 3.3% in July from just 1.9% last October, looks like a response to the tight labor market,” and “the 3-month annualized rate is a startling 5.7%, so the Y/Y rate likely has further to climb,” Pantheon writes. “But the surge in furniture and bedding inflation, to 3.9% in July, and the 6.0% Y/Y rise in prices for floor coverings, are tariff effects, and offer a taste of what would happen if the administration imposes tariffs on a wide range of imported Chinese consumer goods next month.”
  5. Pantheon argues that, even without further tariffs, core CPI inflation may rise to 2.5% Y/Y by the end of 2019, with unfavorable base effects then likely to push it close to 3% by next spring. “The three-month annualized rate now is at 2.8%, and is likely to breach 3% in August, for the first time in eight years,” Pantheon says, “under normal circumstances, this would have the Fed tightening, but the trade war has changed everything, and another easing in September — 25bp rather than 50bp — remains our base case. The endless easing expected by markets, however, will come only if the economy rolls over, if inflation rises as we expect.”
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