CPI Rebounds In July; Fed's Favorite Inflation Indicator Remains 'Sticky'

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by Tyler Durden
Thursday, Aug 10, 2023 - 12:41 PM

Expectations for this morning's must-watch CPI print were for a MoM and YoY rise in the headline, and modest slowing of the core YoY. However, The Fed will be watching its new favorite signal - Core Services CPI Ex-Shelter - which reaccelerated in July (+0.2% MoM, and from +3.9% to +4.0% YoY)...

Source: Bloomberg

The headline CPI rose 0.2% MoM in July (as expected), the same as in June, pushing the YoY up to 3.2% (from 3.0% in June) but below the 3.3% expected...

Source: Bloomberg

Today's increase in CPI YoY broke the record-equaling streak of 12 straight months of declines.

Core CPI rose 0.16% MoM, with the YoY growth in prices slowing to 4.7%.

Source: Bloomberg

Both Goods and Services inflation (YoY) slowed in July - but Services remain extremely high at +6.1%...

Source: Bloomberg

Taking a closer look at the numbers, we find the following:


  • The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance also contributing

  • The food index increased 0.2 percent in July after increasing 0.1 percent the previous month. The index for food at home increased 0.3 percent over the month while the index for food away from home rose 0.2 percent in July. The energy index rose 0.1 percent in July as the major energy component indexes were mixed

CPI Core MoM:

  • The index for all items less food and energy rose 0.2 percent in July, as it did in June. Indexes which increased in June include shelter, motor vehicle insurance, education, and recreation.

  • The indexes for airline fares, used cars and trucks, medical care, and communication were among those that decreased over the month.

Drilling deeper into the main categories we find that shelter inflation continued to rise, but it is now slowing dramatically. Meanwhile, quite a few categories posted sequential declines as noted below:


  • The index for all items less food and energy rose 0.2 percent in July, as it did in June.

    • The shelter index increased 0.4 percent over the month, the same increase as in June.

    • The index for rent rose 0.4 percent in July, and the index for owners’ equivalent rent increased 0.5 percent over the month.

    • The index for lodging away from home decreased 0.3 percent in July after falling 2.0 percent in June.

    • The shelter index was the largest factor in the monthly increase in the index for all items less food and energy.

  • Among the other indexes that rose in July was the index for motor vehicle insurance, which increased 2.0 percent after rising 1.7 percent the preceding month.

  • The indexes for education and recreation also increased in July.


  • The airline fares index fell 8.1% over the month, its fourth consecutive monthly decline, although judging by still soaring airplane ticket prices, this is just another seasonally-adjusted excel gimmick

  • The index for used cars and trucks fell 1.3% in July, after decreasing 0.5% in June.

  • The communication index declined 0.1% over the month, as did the new vehicles index and the household furnishings and operations index.

  • The medical care index fell 0.2% in July, after being unchanged the previous month.

  • The index for hospital services decreased 0.4% over the month, while the index for physicians’ services rose 0.2%.

  • The prescription drugs index was unchanged in July.

On an annual basis, the index for all items less food and energy rose 4.7% over the past 12 months with the shelter index rising 7.7% over the last year, accounting for over two-thirds of the total increase in all items less food and energy.

Other indexes with notable increases over the last year include motor vehicle insurance (+17.8 percent), recreation (+4.1 percent), new vehicles (+3.5 percent), and household furnishings and operations (+2.9 percent).

Source: Bloomberg

Taking a closer look at the all important shelter index, while it is still growing both sequentially and annually, the slowdown in growth is increasing more visible:

  • Shelter inflation up 7.69% YoY in July vs 7.83% in June, lowest since Dec 22; also up 0.43% MoM, lowest monthly increase since Jan 22

  • Rent inflation up 8.03% in July vs 8.33% in June, lowest since Nov 22; also up 0.41% MoM, lowest since March 22

The silver lining here, as noted by former Fed staffer Julia Coronado, is that "we are seeing core inflation slow before the expected big step down in rent/oer" which is great news as "lots of price sensitivity in travel and core goods that was slow to take hold but is now fully coming through." In other words, if and when rent/shelter inflation actually post a decline (with the usual 12-18 month BLS lag), the Fed will be scrambling to fight inflation.

Turning to the wage aspect, for the second month in a row, 'real' wages rose YoY in July (but barely, +0.2%), and it appears that we are about to dip back into real contraction next month.

Source: Bloomberg

So the question becomes - is this an inflection point in inflation? (or is M2 still leading the way?)

Source: Bloomberg

Is the over-optimistic view of the world heading for a disinflationary soft-landing about to crash on the shores of commodity's reality island?