July CPI Report Forecasts: Inflation Softening Trend Intact, Despite Gas Price Pop

As investors look ahead to a Federal Reserve interest rate cut in September, forecasts for the July Consumer Price Index report call for another tame reading on inflation, even though gas prices could lift the reading from the June report.

Forecasts call for the CPI to rise 0.2% on a monthly basis in July after falling 0.1% in June, according to FactSet’s consensus estimates. That would keep the inflation rate constant at 3% on an annual basis. Core inflation, which excludes volatile food and energy costs, is expected to rise slightly to 0.2% on a monthly basis in July from 0.1% in June, a small dip on an annual basis from 3.2% in June to 3.2% in July.

The July CPI report is “going to be bringing more evidence that the disinflation process continues and remains on track,” says Lydia Boussour, senior economist at EY-Parthenon. With that kind of outcome, the report will “reinforce the case for a fed rate cut at the September meeting.”

In the bond futures market, odds for a rate cut are seen at 100% in September, according to the CME FedWatch tool. However, after a weak July employment report and the market turmoil at the beginning of last week, opinions are split over whether the Fed will cut rates by a quarter point or a more aggressive half point.

July CPI Report Highlights

• CPI report release date and time: Wednesday, Aug. 14 at 8:30 a.m. EDT
• The CPI is forecast to rise 0.2% in July after declining 0.1% in June
• Core CPI is forecast to rise 0.2% in July, up from 0.1% in June
• The CPI year over year is forecast to rise 3% in July after rising the same amount in June
• Core CPI year over year is forecast to rise 3.2% in July, down from the 3.3% increase in June.

Gas Prices to Fuel CPI Rise

The trend in inflation is critical to the Fed’s willingness to cut rates, but monthly readings are volatile. After two good months for inflation in May and June, July’s CPI report is expected “to be so-so,” according to José Torres, senior economist at Interactive Brokers.

Torres’ numbers are in line with what seems to be the consensus. He predicts headline CPI growth of 0.2% on a monthly basis and 3% on a yearly basis, along with 0.3% growth for core CPI on a monthly basis and 3.3% on an annual basis. “Energy turned into a little bit of an inflation tailwind. Gasoline picked up a little bit, and we are expecting new and used vehicles to pick up some steam as well. Part of that story is due to lower interest rates,” he says.

Shelter prices increased 0.2% in June, which Torres thought was “really soft and way below the trend,” so he expects that to pick up in July, along with transportation services and medical care.

Services Inflation Seen Up in July CPI Report

Economists at Bank of America predict a 0.3% month-over-month increase in consumer prices in July, “owing mainly to a pickup in core services inflation and energy prices,” resulting in an unchanged year-over-year rate of 3.0%. For Core CPI, they forecast a 0.2% monthly increase. “The key driver of our modest reversal in core CPI relative to last month is core services inflation.” They forecast shelter prices to increase by 0.3% in July and believe that “another month of 0.3% m/m increases in shelter should give the Fed further confidence that inflation is decelerating toward 2%.”

Boussour forecasts headline and core inflation to be around 0.2% on a monthly basis for June, with CPI at 3% year-over-year and core inflation at 3.2%. “We are expecting to see continued softer gains,” she says. For goods prices, she forecasts another downtick in list prices. Service prices will “continue on that trend of a softer momentum that we’ve seen in June.” Boussour also expects a rebound in some categories that were weaker in June, such as airlines, and tame gains in energy and food prices. “So overall, I think this is going to be another report that will show that this disinflation momentum remains in place,” she says.

More Fed Rate Cuts in Store

Last week’s surprising jobs report has increased confidence in a September rate cut and caused many economists, including Torres, to up their forecasts for the number of cuts this year. Torres changed his forecast from one cut to three following the non-farm payroll report. Since then, “the risks have really tilted over to the labor market and to the jobs situation, not so much inflation anymore,” he says, implying the labor market data will be more influential in determining Fed cuts.

In the bond futures market, traders give the Fed a 48.5% chance of cutting the federal-funds target rate by a quarter of a point from its current target of 5.25%-5.50%. At the same time, a 51.5% chance is seen for a half-point cut. Looking further out, the Fed is seen cutting rates two more times by the end of the year.