KEY MESSAGES

 We think a third straight 0.2% m/m core CPI print that lowers the y/y rate to 4.3% (from 4.7%) will help firm up a pause at the coming September FOMC meeting.

 While Fed officials will likely look through a gasoline-driven 0.6% m/m rise in headline CPI, higher energy prices could risk amplifying inflation expectations, which generally remain anchored but at the high end of their ranges.

 We expect a continued moderation in shelter inflation and another contraction in goods prices to keep core inflation relatively subdued. We anticipate little (if any) improvement in non-housing services inflation, which we see continuing to move sideways on a y/y basis.

 We see a 0.3% m/m core CPI print as more likely than 0.1%, given large contractions in several “revenge spending” categories such as airfares over the past couple of months that we think will be hard to repeat in August.

Finally, a cool summer on the inflation front

Summer 2023 has been one of cooling rather than heating, at least when it comes to inflation. With core CPI having increased by annualized rates of 1.9% in both June and July, a third straight such print should help firm up policymakers’ confidence in an emerging disinflationary trend. As in June and July, we expect goods and shelter inflation to help moderate core inflation for August. Wholesale usedvehicle prices are pointing to another decline for retail prices, while higher inventory levels suggest more downside for nonvehicle core goods inflation. Meanwhile, the slowdown in market rents should continue to feed into overall shelter inflation.

On the mend, but a “long way to go”:

Though moderation in these two categories – goods and shelter – may persist in August, we expect little to no improvement in the key non-housing services inflation subset. Specifically, we look for another 0.3% m/m print that should leave the y/y rate steady at 5.3%.

We do not anticipate material improvement in non-housing services inflation without a corresponding softening in the labor market. Evidence is accumulating in that direction – e.g. openings are falling as wage growth is slowing – but we think further material loosening is needed before clearing disinflation for this sticky subset of prices takes hold. Fed Chair Powell hinted at a similar view in his Jackson Hole speech, noting that while the unwindings of both pandemicrelated demand and supply distortions “are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”