Headline Inflation Flat but Core Pressures Remain
According to Deutsch Bank’s Global Markets Research by Joseph LaVorgna , headline inflation was flat because of low energy prices but price pressures excluding food and energy (aka Core Inflation) went higher.
Headline CPI was flat in June due to declining energy prices (-1.4% vs. -4.3% previously). The decline was mostly due to gasoline (-2.0%), although electricity (-0.5% vs. +0.3%) also eased lower. Reduced energy prices will help to provide some buffer to consumers; compared to year-ago levels gasoline is down -4.3%, natural gas is down -13.6% and electricity prices are little changed (+0.5%). Food prices (+0.2% vs. unch.) are not yet moderating significantly, although the year-on-year growth rate is off of its peak (+2.7% vs. +2.8% previously). In the core, pressures remain fairly diffuse. Core inflation rose +0.2% in the month—as it has for 10 of the last 13 months. In year-on-year terms, it is rising +2.2% compared to +2.3% in March-April-May. In the underlying details, there were significant increases in apparel (+0.5% vs. +0.4%), new vehicles (+0.2% vs. +0.2%), medical care services (+0.7% vs. +0.5%), recreation services (+0.6% vs. +0.2%) and miscellaneous personal services (+0.4% vs. +0.3%). Shelter costs continued to rise (+0.1% vs. +0.2%), as rent of primary residence rose +0.1% (+2.7% year-on-year) and owners’ equivalent rent rose +0.1% (+2.0%).
The report also indicated that food and energy prices are likely to be less volatile unless a long term slowdown in production occurs. In addition, it is possible that core inflation would edge up higher if levels of growth improves.
Assuming that H2 GDP growth outperforms H1, we remain of the view that core inflation could edge toward 2.6% by yearend.
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