CITI'S TAKE

We expect a 0.3%MoM increase in core CPI in August. At 0.25% unrounded there is risk of another print that rounds to 0.2%, but a still clearly stronger print than 0.16%MoM increases in June and July and with an expected pick-up in core non-shelter services prices. This would be due to a rebound in airfares, with both seasonal factors and rising energy prices suggesting August could be the month when airfares rise again after recent surprising declines. Rising retail gas prices, especially relative to seasonal trends, will also be a substantial boost to an expected 0.6%MoM increase in headline CPI. Goods prices could remain soft and shelter prices should continue to slow modestly, but stronger core non-shelter services prices would be an important reminder that underlying inflationary pressures remain and should increase the chances of another rate hike from the Fed, which we expect to come in November.

While factors like slowing shelter prices imply that a reacceleration to ~0.5% monthly core CPI increases is unlikely, we expect data starting in August to highlight that the last two months of softer core CPI increases will not last. We expect a 0.3%MoM increase in core CPI in August, although at 0.25%MoM unrounded, this would be close to rising another 0.2% (albeit stronger than the last two months of 0.16% increases).

The key difference in August data compared to June and July should be a rebound in the airfares component after unusually large declines. This would mean that core non-shelter services in CPI rise close to 0.4%, the strongest increase since February.

While core non-shelter services prices in CPI do not always correspond with those in PCE inflation that the Fed targets, this would be an important signal that underlying inflationary pressures remain elevated. Chances of another rate hike from the Fed should rise with an upside 0.3% surprise compared to consensus expectations, as we continue to expect another 25bp rate hike in November.

Our 0.252%MoM core CPI forecast is based on: A 0.22% decline in core goods prices, a smaller drop than last month.

- The decline in goods prices should be largely due to further declines in used car prices, with a 1.5%MoM drop penciled into our August forecast. We also expect another modest 0.1% decline in new car prices, although residual seasonality effects that have been present in previous years during the summer months could be coming to an end soon.

Falling used car prices in August are in line with previous declines in wholesale used car values, which will lead retail prices by a few months, although wholesale prices stabilized in August. Used car prices also typically drop substantially in September with annual discounts, implying a large positive seasonal factor next month. So far, some daily retail price data show prices moving sideways in September. While this might not fully reflect discounting captured in CPI, it could suggest some upside risks for our current September forecasts that again pencil in another substantial decline in used car prices in September.

- An important factor leading to our borderline 0.3%MoM core CPI forecast is an expectation for a bounce-back in apparel prices. Apparel prices had risen consistently for much of the last year before falling very modestly in July. We have penciled in a 0.2% increase in August. Similar patterns were seen in apparel prices in July/August in 2022 and 2021 suggesting some residual seasonality issue.

- Other goods prices are still likely to be soft overall in August, although we have been noting that many of the disinflationary forces impacting goods prices over the last year, such as falling commodity prices and supply chain corrections, could be coming to an end. As goods demand remains strong and has started to pick up again, this could also imply support for consumer goods prices. Possible upside risks for goods prices could materialize more into the Q4 shopping season.