United States: Core CPI momentum seen returning in July – TD Securities

TD Securities economists anticipate the United States July Core Consumer Price Index (CPI) will return to trend following the unexpected decline in June. They project Core CPI at 0.20% month-over-month (m/m) and 2.4% year-over-year (y/y), while Headline CPI at 0.15% m/m and 3.4% y/y. Should the bounce from June's weak categories persist, upside risks may emerge.

The upcoming CPI data is expected to demonstrate underlying inflation rebounded after being dragged lower by one-off items in June, with Core CPI anticipated to increase 0.20% m/m. The services sector is expected to propel upward, while core goods prices may add to inflation for the first time in three months. Rents and other residential expenses (OER) are projected to rebound slightly after moderating more than anticipated in June, with an m/m growth of 0.26% and 0.27%, respectively.

Core CPI is forecast to rise 2.4% y/y, down 20 basis points from June, while headline inflation is expected to decrease 10 basis points to 3.4% y/y. The main risks to these forecasts are viewed as favorable, should the rebound from June's one-off declines prove stronger than expected. Headline CPI is anticipated to rise 0.15% m/m in July, despite the energy component continuing to exert a downward pressure (gasoline: -2.9% m/m).

Food prices are likely to experience additional momentum gains in July due to another increase in grocery prices. Core inflation is expected to continue its positive trend through September, peaking in May at 2.9% y/y, while headline inflation may have reached its yearly maximum of 4.2% in May. However, both series will likely regain momentum in Q4, contingent on the resolution of the Middle East conflict.