Discover more from Economics Uncovered
US CPI Preview: July 2023
For the first time since June 2022, I expect annual CPI growth to rise in July, but I forecast that the core CPI will keep moderating.
For the first time since June 2022, I expect the annual rate of CPI inflation to increase, rising from 3.0% in June, to 3.2% in July (vs 3.3% consensus).
In contrast to the expected rise in the headline CPI, I expect the core CPI to fall to 4.6% (vs 4.8% consensus), down from 4.8% in June.
On a spot market rent adjusted basis, I expect headline CPI growth of just 0.5% YoY (vs 0.5% in June), and core CPI growth of 1.2% (vs 1.6%) in June.
With wholesale used car prices having recorded several months of significant declines, I expect this to begin flowing through to CPI used car and truck prices in July.
Annual food price growth is expected to continue moderating, with food at home price growth expected to moderate to 3.4% YoY.
The CPI energy commodities index is expected to see its significant YoY decline moderate in July, but the bulk of the impact of the recent rise in gasoline prices (should it continue) is expected to be seen in August’s CPI report, not July’s.
Apartment List data shows that spot market rents were down 0.7% YoY in July, continuing the enormous divergence between underlying spot market rents and the CPI’s lagging rent of shelter (up 7.9% YoY in June).
CPI recreation services and CPI other personal services are two key services related items to watch for additional signs of disinflation in July.
Used car prices expected to see a significant fall
With wholesale used car prices (as measured by the Manheim Used Vehicle Value Index), having recorded several months of significant declines, CPI used car and truck prices are expected to see a material MoM fall in July.
This expectation is based upon wholesale prices declining 1.7% in May, with the CPI’s retail used car & truck prices tending to lag wholesale prices by 2 months.
Note that as was seen in June’s CPI data, the 2-month lag does not precisely translate into CPI used car & truck prices, and it’s not unusual for there to be a significant amount of variation, either positive or negative, between the Manheim and CPI data. Though as can be seen in the chart below, the Manheim Index nevertheless consistently provides a strong yardstick to estimate the change in volatile CPI used car and truck prices.
Annual food price growth expected to keep moderating
Moving to the nondurables category, annual CPI food at home price growth is expected to keep moderating in July, falling to 3.4%. This comes on the back of significant prior declines in the UN FAO Food Price Index, which CPI food at home prices are highly directionally correlated to on a 6-month lagged basis.
The continued expected moderation in CPI food at home prices comes as MoM growth has decelerated back towards its historical (2010-19) average in recent months — a major contrast to the growth that was being recorded this time last year.
While more lagging on account of its greater exposure to services related price pressures, annual CPI food away from home price growth is also expected to moderate in July.
This comes on the back of an expected continuation in the shift to relatively less significant MoM price growth in Q2 versus Q1.
With MoM growth elevated during the year ago period, I expect the annual growth rate for CPI food away from home prices to fall to 7.3% in July, down from 7.7% in June.
Energy commodities are expected to move beyond the trough in July — but the recent jump in oil prices is expected to be predominately felt in August
After plunging to -26.8% YoY in June, I expect the CPI energy commodities index to move past the trough in July, to -20.0%.
While many have been focused on the recent rise in oil prices, assuming prices hold at current levels, its impact on retail gasoline prices is expected to be predominately felt in August, as opposed to July’s CPI report.
Spot market rents now down 0.7% YoY, with the stark contrast to the CPI’s lagging rent based measures expected to continue
As measured by Apartment List, spot market rental prices were down 0.7% YoY in July, versus a flat reading in June.
This comes as MoM growth in the Apartment List Rent Index continues to be below levels that are typically recorded for a given month. In July, MoM price growth was 0.3% below its 2017-19 average.
In comparison, the CPI’s rent of shelter index is far and away exceeding spot market rental price growth, which grew at a YoY rate of 7.9% in June.
Though with MoM growth in spot market rents also moderating in July on account of seasonal factors, I forecast a moderation in the MoM growth rate of owners’ equivalent rent (OER) and rent of primary residence (RPR) in July.
Given that OER and RPR are not only lagging, but smoothed on account of the way they are calculated, I continue to forecast only a modest moderation, while noting the potential for a larger moderation in the months ahead as spot market rents enter their seasonally weakest period.
Recreation and other personal services the key area to watch for more signs of services disinflation
Over recent months, adjusted core services price growth has fallen from a peak of 6.6% in February, to 4.9% in June.
With motor vehicle maintenance and insurance price growth remaining elevated, and other areas like education & communication services already recording modest growth, the more likely near-term drivers of additional disinflation within the services price category are recreation services and other personal services, with both categories recording a moderation in MoM growth in 3 of the past 4 months.
In July, I expect another month of relatively more moderate CPI recreation services price growth.
For CPI other personal services, in taking into account the record MoM growth in April, I am forecasting much larger MoM growth in July vs June. Should MoM growth instead continue to reflect the much lower levels that have been seen during the past two months, this is one category that could see materially lower MoM growth vs my forecast.
Monthly CPI and core CPI growth expected to be above historical averages — lagging rent makes it difficult to be otherwise
Putting everything together, monthly CPI growth is expected to be modestly above its historical (2010-19) average in July.
Looking at the core CPI, MoM growth is again expected to be above its historical monthly average, but by the smallest gap seen since November 2022.
As long as lagging rent based measures continue to deliver high MoM growth, it will be difficult for both the CPI and core CPI to consistently deliver MoM growth that is consistent with their long-term average — again, this is why it’s important to look at the CPI on a spot market rent adjusted basis, which I do below.
Headline CPI expected to see its first YoY increase since June 2022, core CPI expected to keep falling
Putting everything together, I expect the CPI to record its first increase in its YoY growth rate since June 2022, rising from 3.0% in June, to 3.2% (3.16%) in July (vs 3.3% consensus).
Meanwhile, I expect the more lagging core CPI to record its fourth consecutive moderation in its YoY growth rate, falling from 4.8% in June, to 4.6% (4.63%) in July (vs 4.8% consensus).
When adjusted for spot market rents, both the headline and core CPI are expected to be well below 2% YoY
Given the heavily lagged nature of the CPI’s rent based measures, and the extreme YoY divergence that currently exists between them and underlying spot market rents, it continues to be important to measure and analyse inflation on a spot market rent adjusted basis, which gives a better indicator of underlying inflation pressures.
On such a basis, I expect both the headline CPI (0.5% (0.52%) in July vs 0.5% in June) and core CPI (1.2% (1.23%) in July vs 1.6% in June) to be well below 2% YoY in July.
The Fed has largely overlooked the fall in the headline CPI, choosing to instead focus on the core CPI — what will it do now if the core CPI keeps falling but the headline CPI rises?
With the headline CPI seeing a decline in its YoY growth rate for 12 consecutive months, should it rise as expected in July, and be pressured by rising gasoline prices in August, it will be interesting to see if the Fed stays consistent with its focus on core CPI inflation, which I currently expect to not only fall in July, but throughout 2H23 (see my latest medium-term US CPI forecast here).
Instead of focusing on either unadjusted metric, I believe that the better way to measure underlying inflation is to adjust the CPI for spot market rents.
As opposed to high inflation, with: both the headline CPI and the core CPI expected to be well below 2% YoY once adjusted for spot market rents; the M2 money supply declining at its fastest pace since the Great Depression; and annual loan & lease growth sharply moderating, the bigger medium-term risk for the US economy, is that of a deflationary bust.
Thank you for reading my latest research piece — I hope it provided you with significant value.
Should you have any questions, please feel free to leave them in the comments below!
In order to help support my independent economics research (remember, everything you see — the forecasts, the charts, the analysis, the in-depth explanations of economic history — is all completed independently by me, for you), please consider liking and sharing this post and spreading the word about Economics Uncovered.
Your support is greatly appreciated and goes a long way to helping make Economics Uncovered a sustainable long-term venture that will be able to continue to provide you with valuable economic insights for years to come.
If you haven’t already subscribed to Economics Uncovered, subscribe below so that you don’t miss an update.