The US CPI for July, the key indicator of the week, came in entirely in line with expectations: month-on-month 0.1% (against 0.1% expected and negative 0.4% previously), month-on-month core 0.2% (compared to 0.2% expected and against 0.0% previously), year-on-year 3.4% (against 3.4% expected and against 3.5% previously) and core year-on-year 2.5% (against 2.5% expected and against 2.6% previously).
Report by Intermoney
On Wednesday, we saw the week’s key figure, the US CPI for July, which came as no surprise. On a monthly basis, prices rose by just one-tenth of a percentage point, which was enough to bring the year-on-year figure down to 3.4%, with both figures in line with expectations, as was the core CPI (2.5% year-on-year).
As was the case in June, energy prices—and with them, hydrocarbon prices—continued to fall, down by 1.5 per cent and 2.9 per cent respectively. Although the falls were more moderate than in June, the fact that petrol prices remained in negative territory corroborated our view that the average crude oil price in July, following the resumption of attacks, was more or less in line with the price per gallon of petrol at that time; consequently, we did not expect any upward surprises. Broadly speaking, July’s prices offer further signs that the impact of the energy price shock triggered by the war with Iran continued to fade in July, just as the upward momentum from tariffs is beginning to wane, which in the second half of the year will contribute to downward pressure on prices.
Among the notable movements, core goods rose by 0.2 per cent over the month (compared with the previous decrease of 0.1 per cent), as car prices surprised on the upside: both new vehicles (0.1 per cent month-on-month) and, above all, used cars (0.4 per cent month-on-month) were among the few categories to surprise on the upside. And although to be expected, the prices of software and computer accessories were nonetheless striking, rising by a record 21.2% year-on-year, following a month-on-month increase of 0.5% (having already risen by 2.3% month-on-month in June). In this regard, the shortage of memory chips and the rising cost of processing equipment is something we will have to contend with whilst the race to develop AI continues to intensify. However, it should be noted that computers and communications account for a very small share of the CPI basket: just 0.7 percentage points. The price of airline tickets also contributed to the rise (up 2.2% month-on-month / up 25.5% year-on-year), as kerosene prices are indeed causing more problems.
Conversely, some sub-categories that had previously recorded sharp increases due to the rise in tourism surrounding the FIFA World Cup eased pressure on the overall index: hotel accommodation fell by 2.8 per cent month-on-month, whilst car and lorry hire fell by 3 per cent. With regard to accommodation services, although we saw a greater monthly rise in owner-equivalent rent and primary residence rents (both up 0.3% month-on-month), this does not alter the fact that we continue to observe these items maintaining their disinflationary trend. In fact, primary rents remain below 3% compared with July last year and are already falling outright in a growing number of states, according to data from Zillow and Realtor.com. We were also pleased to see that car insurance fell by 0.3% month-on-month.
Prices in this category, which had caused headaches last year, have fallen in six of the seven months so far this year, reflecting a more structural underlying disinflation.
Of the four key macroeconomic indicators ahead of the July meeting (two on employment and two on prices), we are now halfway through. July’s CPI is just good enough to reduce the likelihood of a rate rise in September, although this reduction is limited because the key figures were in line with estimates, and it is simply the absence of surprises that serves to moderately dampen expectations of a rise. The CME survey showed that the probability of a 25 bp rate rise fell from nearly half to 38 per cent. Meanwhile, in the fixed-income market, yields on the 2-year bond fell by 2.5 bp (4.19 per cent) following the publication of the report. And although these falls were widespread across the entire yield curve (down 3.0 basis points for the 5-year and 2.0 basis points for the 10-year), we must not lose sight of the fact that we will have further information on the fiscal deficit this evening. In this context, the $75,000 million in tariff refunds paid out during May and June could mean that yields on longer-term bonds are once again overshadowed by budgetary imbalances.
