The unchanged headline CPI for July matched the expected reading; this follows a reading of 0.2% in June. The core rate was a little lower than expected at 0.1%, following an increase of 0.2% for the last three consecutive months. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 0.8% and 2.2% higher, respectively.
The CPI’s energy price index fell in July by 1.6% (first fall since February), following a 1.3% rise in June. If we exclude the effects of energy, the CPI would still have been 0.1% higher sequentially in July and was 1.9% higher than a year ago. The CPI excluding food prices would have been unchanged month-to-month and was 0.9% higher year-over-year. Food and energy combined account for slightly less than 25% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (which is 33% of the CPI) rose by 0.2%, medical care by 0.5%, new vehicles were up 0.2% (first increase since February), and motor vehicle insurance also rose, this time by 0.4%—the ninth consecutive monthly increase. Lastly, prices for personal care rose 0.2% following four consecutive monthly declines. Any drag largely came from airline fares, used cars and trucks, and tobacco.
It is once again worth noting that the “services less energy services” component of the CPI accounts for 59.6% of the entire index and is growing by 3.1% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
July’s increase in the CPI was again largely driven by the main components of shelter and medical care. Energy prices were back to being a drag following several months of improvement. With the economy closer to full employment, we should start to see some increase in wage growth; so far any increases have been spotty and mixed, with the overall trend still fairly muted. With demand growth also still relatively lackluster despite the best efforts of the central banks globally, inflation also as a whole remains relatively quiescent. In terms of inflationary expectations, while TIPS yield spreads are still extremely low, they also suffer from some liquidity issues hampering their usefulness as an inflation gauge. Inflation expectations from the University of Michigan’s survey (which has no liquidity issues in contrast to the TIPS data) also is showing longer-term inflationary expectations around the lowest they have been since at least 1990. It seems increasingly the case that investors and consumers need to ‘see it to believe it’. These low expectations also help explain the very low level of longer-term interest rates at the moment and the growing belief that the Fed will delay raising interest rates until 2017.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.