The U.S. Bureau of Labor Statistics will release the July CPI data on August 14 (Eastern Time). The market broadly expects headline CPI for July to rise by 3% year-over-year, consistent with June's figure, and by 0.2% month-over-month. Core CPI is expected to increase by 3.2% year-over-year, slightly slowing from June's 3.3% rise, and by 0.2% month-over-month, higher than June's 0.1%.
Since March of this year, price increases in the U.S. have been showing signs of slowing, with the June CPI report surprising on the downside, continuing this declining trend. The subsequent decline in nonfarm payroll data and the unexpected rise in the unemployment rate further strengthened market expectations for interest rate cuts. As the U.S. economy and labor market show signs of fatigue, the latest inflation report will draw significant market attention and could influence the timing of a potential policy shift.
July CPI: A Major Release
Fed Chairman Jerome Powell previously hinted that rate cuts could occur as soon as September. The Fed is focusing more attention on the August nonfarm payrolls and CPI data. This report is the second-to-last CPI release before the Fed's next rate decision (in September), potentially adding weight to the prospect of a rate cut in September.
Should an unexpected upward trend emerge, it could rekindle market concerns about stagflation, as it would imply that the Fed may not be able to cut rates quickly even in the face of an economic slowdown. On the other hand, if core inflation continues to decline, it could strengthen the Fed's confidence in cutting rates while boosting investor sentiment, further fueling expectations for a 50-basis-point rate cut in September.
Housing Inflation
Housing-related costs, which account for about one-third of the CPI weight, have been one of the most stubborn components of inflation and are key to whether core inflation can decrease. Overall, although housing inflation has been slow to decline, the trend is still downward. In June, housing prices rose 0.2% month-over-month, while rent and owners' equivalent rent (OER) both rose 0.3%, all moderating from previous figures.
However, based on the latest data on new and existing home sales, the inventory of new homes for sale in the U.S. remained at a high of 476,000 units as of the end of June, enough to supply 9.3 months of demand, the longest period since October 2022. The inventory of existing homes increased by 23.4% year-over-year, enough for 4.1 months of supply, the highest in four years. Meanwhile, both new home sales and existing home sales fell more than expected, with U.S. new home sales down 0.6% and existing home sales down 5.4% month-over-month in June.
In terms of prices, new home prices remain high, and existing home prices rose 4.1% year-over-year, hitting a new record. Coupled with mortgage rates rising to an average of nearly 7% in June, affordability remains a challenge for buyers. The continued decline in mortgage applications suggests that lower borrowing costs may be necessary to stimulate demand.
In summary, on the one hand, homeowners who secured low-interest-rate mortgages before the pandemic are unlikely to sell their homes in today's high-rate environment, which reduces the supply of homes for resale and supports home prices. On the other hand, high mortgage rates and home prices are deterring buyers, while the slowdown in inflation suggests interest rates may drop in the coming months, leading more potential buyers to adopt a wait-and-see attitude or even shift to renting, thereby supporting rental market prices.
Thus, despite the ongoing deflationary trend, July's main residential rents and OER are expected to rebound moderately, supporting core inflation.
Energy Inflation
Energy prices continued to decline in June, falling 2.0% month-over-month. The significant 3.8% drop in gasoline prices was a major reason for the CPI slowdown in June, offsetting the impact of rising housing prices.
According to the American Automobile Association (AAA), as of July 31, the national average price of unleaded gasoline was $3.48 per gallon, a 0.2% decrease from the end of June and 8% lower year-over-year. AAA spokesperson Andrew Gross noted that despite hurricane impacts and record holiday travel, overall gasoline demand has decreased, an unusual phenomenon for the holiday season that may signal a shift in demand trends.
Additionally, based on the latest data from the Energy Information Administration (EIA), U.S. gasoline demand dropped from 9.25 million barrels per day to 8.96 million barrels per day. Total domestic gasoline inventories rose from 223.8 million barrels to 225.1 million barrels. The decline in demand for gasoline, combined with an increase in supply and stable oil costs, could further drive gasoline prices down.
The downward trend in gasoline prices currently appears to be persistent, which could lead to another drop in energy commodity prices. Since energy commodities account for more than 60% of the overall energy category, this reduction could lower energy inflation. It is expected that energy inflation will continue to decelerate in this upcoming report.
New and Used Vehicles
Although prices for both new and used vehicles decreased in June, the costs associated with automotive maintenance and insurance have actually risen significantly, creating a challenging environment in the automotive market.
Data from Manheim, the largest used car auction platform in the U.S., indicates that the Manheim Value Index rose to 201.6 in July, reflecting a MoM increase of 2.8% - the first uptick in ten months. Wholesale prices for used cars, adjusted for model, mileage, and seasonality, have also surpassed those of June. Furthermore, combining insights from vAuto, Manheim estimates that retail sales of used cars in July increased by 5% MoM while experiencing a 2% decline YoY.
Meanwhile, the Dealertrack Credit Availability Index reveals that the overall loan index dropped for the fourth consecutive month, landing at 92.9 in July. Access to automotive credit across all channels and lender types is diminishing. Elevated interest rates and stringent credit conditions continue to limit the industry's sales potential. Many consumers are opting to hold off or seek more affordable options, as evidenced by the rising rates of credit delinquencies and defaults.
According to Cox Automotive's automotive market report, new vehicle sales in July experienced a YoY decline of 2.0% and a MoM decrease of 3.0%. The average transaction price for new vehicles remained relatively stable compared to June, with a slight YoY decrease of 0.2%. The CDK cyberattack in June hindered many dealerships' ability to process transactions, leading to a decline in new vehicle sales for that month. The automotive dealers association anticipated this event could drive sales in July; however, it appears that July has not fully recovered the losses incurred in June.
Overall, it is expected that new vehicle prices may continue to show a downward trend, while the rate of decline for used vehicle prices is expected to narrow MoM.
Transportation Services
In the transportation services sector, after a 0.9% increase in April, there were consecutive MoM declines of 0.5% in May and June, primarily driven by fluctuations in airfare and automobile insurance premiums.
Since the onset of the COVID-19 pandemic, automobile insurance premiums have surged, becoming a significant factor contributing to the super core inflation in the U.S. According to the latest report from Insurify, the average cost of full auto insurance in the U.S. rose to US$2,329 in the first half of 2024, marking a 15% increase compared to last year and a staggering 48% rise from 2021. The escalation in car maintenance and repair costs, alongside frequent climate-related disasters, has compelled insurance companies to raise premiums to protect their profits. It is expected that insurance premiums will further increase by the end of 2024, suggesting that this segment may continue to experience substantial growth in the current data.
Airfare recorded MoM changes of -3.56% and -5% in May and June respectively, primarily influenced by a continuous decline in jet fuel prices. Although these prices experienced a temporary rebound at the end of June, peaking at US$102.75 per barrel in early July, a reversal in trend in mid to late July may indicate a further decline in airfare for that month.
Overall, considering the ongoing possibility of a slowdown in "energy inflation," it seems that the headline CPI may continue to align with the trend of easing inflation. However, slight increases in tenant rents and owners' equivalent rent, along with rising motor vehicle insurance rates, could result in a mild uptick in the MoM pace of core inflation.
It is important to note that this CPI release may differ somewhat from previous ones. The last time inflation fell to 3% was in July 2023, after which it began a rebound. As a result, there has been speculation that the "final mile" of inflation will become increasingly challenging to navigate, characterized by potential turbulence. With inflation returning to 3% again, the question of whether it will rebound like it did last year has become a central focus for the market, influencing expectations going forward.
If a rebound occurs, the market may perceive inflation as remaining sticky, and the "door" to the "final mile" of inflation might remain firmly shut, potentially dampening expectations for interest rate cuts. This could lead to a significant rebound in the U.S. Dollar Index, possibly exceeding the impacts of prior CPI results. Conversely, as long as headline inflation remains stable at 3%, there may not even be a need for rate cuts; given the market's tendency to act preemptively, this could still be viewed as a victory, resulting in a swift increase in expectations for rate reductions.
Therefore, regarding the upcoming CPI data, the primary focus should be on whether the headline CPI can stabilize at 3%.
The Fed indicated in its July interest rate decision statement that while long-term inflation expectations remain persistent, the risks of inflation rising have diminished. They reiterated that action would only be considered when there is greater confidence in inflation sustainably moving towards the 2% target.
However, the weak U.S. employment report for July has raised recession expectations and heightened concerns about maintaining interest rates at excessively high levels for too long. The market is currently pricing in a 100% chance of a rate cut in September, shifting attention to how much the Fed should reduce rates. The release of this data may lead to market speculation on whether the Fed will cut rates by 25 basis points or adopt a more aggressive stance with a 50 basis point reduction.