US DATA PREVIEW: Inflation Reports To Show Modest Acceleration

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - Expectations for this week's July inflation reports

point to moderately faster monthly growth than in the previous month, but at

rates that should keep the year/year pace safely below 2%.

     Analysts see headline CPI, released on Friday, posting a 0.2% increase in

July, up from a flat reading in June. Additionally, analysts expect core CPI to

increase 0.2%, up from 0.1% in June. This would set both core and headline CPI

year/year to a 1.8% increase. PPI will be released the day prior to CPI and the

median forecast for the headline and core is also expected to match 0.2% gains. 

     Analysts generally agree that July should mark the end of softer than

expected inflation data. This, in part, is due to the belief that energy prices

will no longer be dragging the indices, as gas prices have steadied. In

comparison, last July, CPI energy prices fell 1.1% from June and were down 10.9%

year/year. 

     In addition to energy prices posting a soft rebound, analysts are also

watching prescription drugs, rent, and apparel prices. After negative growth in

apparel for the past four consecutive months, Nomura is forecasting there may be

a rebound in July, partly owing to the series' mean-reverting tendency. However,

after the decline in June for apparel sales shown in the wholesale trade report

released Wednesday, there is a potential this could cause a shift in apparel

prices. 

     Energy prices may be posting a rebound, but analysts predict that new and

used car sales, in particular, will continue to drag consumer inflation. This

would be the sixth consecutive decline in new and used car prices in the CPI,

due to high inventories of ex-lease vehicles. But Morgan Stanley states that

despite predictions for depressed auto prices, National Automobile Dealers

Administration shows promise that July will face a smaller decline.

     As for PPI, analysts are closely watching services - as it makes up

two-thirds of the index. Stone McCarthy sees PPI as being relatively stable as

prices have firmed recently. While many analysts expect services to rise, they

caution that this would be modest due to the continued unwinding from May's

sharp rise in the closely watched volatile trade services. Other categories

being watched are pharmaceuticals, food, and energy prices. Some analysts are

predicting energy prices to rise as lower prices for gasoline and natural gas

offset the higher prices for residential electricity. JP Morgan expects that for

PPI, seasonally adjusted gas prices have increased, but that a fall in natural

gas will cause a slight offset. However, Goldman Sachs is predicting a decline

in gasoline margins and energy prices to only cause a more modest rise in core

producer prices. 

     Despite the general consensus among analysts that there will be a small

rebound in inflation, TD Securities cautions that there could be a downside miss

due to the continued drag from forces such as wireless services, autos, and

apparel. The notion that apparel could prove to be a drag on inflation is

contrary to other analysts' predictions. This follows Fed Chair Janet Yellen's

remarks in June that weak inflation was largely due to reductions in areas such

as wireless services and prescription drugs, but Yellen emphasized that these

drags would not persist.

     Amidst expectations for a 1.8% year/year increase in CPI, compared to the

Fed's 2.0% target for year/year inflation, analysts continue to speculate

whether the Fed will change their timeline for rate hikes. Despite the forecast

being close to the Fed's target, the Fed's preferred measure of year/year

inflation, the core PCE price index, is sitting at 1.5% through June, showing

inflation is still coming in softer than expected. Even though that price

measure is lower than the 2.0% target, if CPI comes in as expected, analysts

generally continue to believe the FOMC will stick to the current calendar and

announce plans to reduce the balance sheet in September, with a forecasted rate

hike in December. Natwest reflects this sentiment, stating that this week's data

should keep the Fed on target to change only its reinvestment policy in

September, and not hike rates before December.

     However, great attention remains on whether inflation will remain weak,

despite the Fed claiming that this is only transitory - which could signal a

delay in rate hikes. Analysts such as Stone McCarthy state that a continuance of

soft inflation in the next few months could amount to a slowdown for interest

rate hikes. Echoing much the same, TD Securities warns that a soft CPI could

spook the Fed, but that July's numbers might still be too early to signal a

slowdown in their plan.  

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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