US CPI:Modest gains in services offset a fall in goods prices

July CPI inflation rose for the fifth consecutive month as the drag from last year's energy price declines continued to fade and as core prices rose moderately. Headline CPI increased by 0.1% m/m in seasonally adjusted terms, just below  forecast (0.2%) and consensus expectations (0.2%). Core CPI also rose by less than expected (0.1% m/m; Barclays and consensus: 0.2%). The NSA CPI index came in at 238.654, slightly below forecast (238.700) and that of the consensus (238.752). Energy prices increased by 0.1% m/m, and food prices rose a modest 0.2% on the month. On a y/y basis, total CPI rose 0.2% and core CPI rose to 1.8%.

Core services prices continued their recent gains, with the increase broad-based across most categories. Shelter inflation held up through July, with rent of primary residences and OER both up 0.3% m/m. Medical care services increased 0.1%, reversing course after falling in June. Transportation prices fell a modest 0.2%, as airline fares fell by a larger-than-expected 5.6%. Core goods prices declined 0.1% m/m, adding to the trend weakness in this category. The composition of the decline, however, was slightly different than in recent months. Apparel prices rose 0.3% m/m, after declining for three consecutive months. Despite strong domestic demand for cars which should continue to support motor vehicle prices, prices of new vehicles fell 0.2% m/m, following consistent increases over the past five months. Used car prices posted another sizable decline on the month (0.6%). Medical commodities rose 0.1% m/m, and tobacco prices were unchanged on the month.

"Ongoing increases in CPI inflation should give members of the FOMC confidence that underlying inflation trends are positive, as the trends will also boost headline PCE, their preferred measure of inflation. We believe these recent improvements should outweigh risks to the forecasts, driven by the renewed decline in commodity prices and the recent surge in the value of the dollar. We receive July PCE inflation on August 28", says Barclays.