US headline CPI flat in July; core CPI likely to firm in 2016

US headline CPI came in flat in July in sequential terms, consistent with consensus projections. The softer data is due to drop in energy prices that countered a slightly rise in core inflation. Energy prices fell for the first time in five months, pulling down the headline print. Meanwhile, food prices were neutral.

On an annual basis, the consumer price index rose 0.8 percent in July. On a month-on-month basis, energy prices declined 1.6 percent, while on a year-on-year basis the prices fell 11 percent. If it were not for low energy prices, inflation in the country would be closer to 2 percent, said TD Economics in a research report.

In July, core inflation came in weaker than anticipated. It accelerated just 0.1 percent in sequential terms and 2.2 percent year-on-year, noted Barclays in a research report. The softer core inflation was due to more volatile components on both core goods and services. Prices of used cars and trucks continued to fall sharply by 1 percent month-on-month.

Moreover, the airline fares dropped 4.9 percent month-on-month, pulling down core services. Meanwhile, in the core goods category, apparel and new vehicles prices steadied after the decline recorded in June, and medical care commodities increased for the second consecutive month. Services, excluding energy, were up 0.2 percent month-on-month and 3.1 percent year-on-year.

Rent of primary resident and owners’ equivalent rent was up 0.3 percent each on month-on-month terms. Medical care services inflation quickened to 0.5 percent month-on-month, whereas transportation costs fell 0.2 percent due to airline fares.

Even if the overall core CPI inflation measure was disappointing, the July CPI report in detail was more encouraging, said Barclays in a research note. On a year-on-year basis, core goods CPI seem to have steadied at -0.6 percent, while core services continue to be solid at 3.1 percent.

“Domestic price pressures remain strong as slack in the economy has diminished, and we expect core services CPI to continue driving inflation higher,” added Barclays.

Moreover, the direct drag from the fall in energy prices in 2014 and dollar strength has waned. Thus, the core CPI is expected to continue to strengthen further in 2016, according to Barclays.