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MS Look For Resumption Of Core Disinflation

  • Morgan Stanley forecast core CPI at 0.27% M/M in June (cons 0.3), as core goods drop on a large deceleration in used car prices and core services ease from 0.40% to 0.34% M/M.
  • Leading indicators point to used cars prices increasing 0.7% M/M after 4.4% in April and May, with outright deflation to resume in 3Q23. News around price cuts from some of the major auto manufacturers further increases the probability of new cars falling into deflation, but we expect a sharper decrease in used car prices throughout the year as the relationship between used and car prices normalizes.
  • OER seen at 0.50% from 0.52, rent at 0.46% from 0.49%.
  • Medical inflation should again be a major drag on core services. We expect some payback in airfares after a low print in May, but decreasing fuel oil prices should keep sequential rates in negative territory.
  • Importantly, core services ex-housing should decelerate from 0.24% to 0.13% M/M. However, the Fed's preferred PCE version is currently tracking only a small moderation to 0.2% M/M in June (vs 0.23% M/M in May).
  • Headline CPI meanwhile is seen at 0.29% M/M, with a bounce in energy (0.87%) but modestly softer food (0.13%).

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