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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
[TOPICS: MAUPR$,M$U$$$]

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