CPI July Chart

Moderating Gains for U.S. CPI in July

The CPI report revealed moderating but still hefty gains in July of 0.5% for the headline and 0.3% for the core, following four months of particularly outsized gains that culminated with 0.9% headline and core price increases in June. The June headline rise was the largest since a 1.0% jump in June of 2008, while the core gain tied the rise in April of both 2021 and 1982 as the biggest rise since September of 1981. Today’s increases look modest in comparison but are still big. The powerful updraft in vehicle prices and airfares are finally starting to turn, after a massive three-month climb that fueled the big headline gains, though we’re seeing persistent gains in most of the remaining components.

  • CPI rose 0.5% after a 0.9% June gain, leaving the four largest y/y gains in 13 years of 5.4% in both June and July, 5.0% in May, and 4.2% in April.
  • CPI core rose 0.3% after a 0.9% June gain, leaving the three largest y/y gains in 29 years of 4.3% in July, 4.5% in June, and 3.8% in May.
  • The July gains rounded from respective increases of 0.474% and 0.329%.
  • CPI energy prices rose 1.6% in July, while food prices rose 0.7%.
CPI July Chart
CPI July Chart

The y/y CPI headline metric sustained the June rise to 5.4% from 5.0% in May and 4.2% in April, leaving the four largest gains since 2008. The y/y core CPI measure fell to 4.3% from 4.5% in June and 3.8% in May, leaving the two largest gains since 1991 and 1992 respectively.

Used car prices rose by just 0.2% in July, following massive increases over the prior three months of 10.5% in June, 7.3% in May, and 10.0% in April.

New car prices rose by a solid 1.7% in July however, after solid gains of 2.0% in June, 1.6% in May, and 0.5% in April.

Airfare prices fell -0.1%, after outsized gains of 2.7% in June, 7.0% in May, and 10.2% in April.

For additional price restraint, apparel prices were flat in July, after gains of 0.7% in June, 1.2% in May, and 0.3% in April.

CPI was lifted by energy prices in June and July, after restraint in April and May. Headline energy prices rose 1.6% in July and 1.5% in June, after a flat May figure. Gasoline prices rose by 2.4% in July and 2.5% in June, after falling -0.7% in May and -1.4% in April.

Food prices rose 0.7%, after gains of 0.8% in April and 0.4% in both April and May.

There were other solid price increases in the report. Owners’ equivalent rent rose by 0.3% for a third consecutive month in July, versus 0.2% gains in both March and April.

Medical care service prices rose 0.3%, after a flat June figure, a -0.1% May drop, a flat April figure, and a 0.1% March rise.

Tobacco prices rose by 0.5%, after gains of 0.6% in June, 0.1% in May, 0.2% in April, 0.6% in March and February, and 1.8% in January. These prices haven’t fallen since May of 2020.

On a moving average basis, CPI headline gains are trending higher after the sharp pull-back in Q2 of 2020. We have 6-month average price gains of 0.628% for the headline and 0.550% for the core, versus respective 12-month average gains of 0.430% and 0.347%.

Consumer prices have revealed a massive 2021 lift from huge PPI and trade price gains that have worked their way through the system, alongside widespread capacity constraints and bottlenecks, alongside “base effects” that lifted the y/y measures in Q2.

We expect a drop-back in y/y gains to the still-elevated 4.3%-5.0% area by December. We have yet to see if this pull-back will be fast enough to prevent a lift in inflation expectations into 2022, which will likely determine if the 2021 rise in the inflation metrics is “transitory.”

In August we assume CPI gains of 0.3% for the headline and 0.2% for the core, with a 2.5% gasoline price gain. The y/y CPI gain would slip to 5.3% from today’s 5.4%, while the y/y core price gain would slip to 4.1% from today’s 4.3%.

For the July PCE chain price indexes, we now assume gains of 0.3% for both the headline and core. This would leave a y/y headline metric rising to 4.1% from 4.0% in May and June, while the y/y PCE core metric remains at 3.5%.

We expect July consumption figures of 0.6% in nominal terms and 0.2% in real terms, which correspond to an estimated July retail sales drop of -0.6%, with a -0.2% ex-auto figure.

We expect July PPI gains of 0.3% for both the headline and core and a 0.5% PPI headline rise on the old SOP basis. July trade price gains are pegged at 0.7% for imports and 0.8% for exports.

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