• The core CPI for July rose 0.33% (month-over-month), falling short of expectations after four consecutive upward surprises. The breakdown was mixed, but overall milder than expected, as housing inflation slowed (owner-equivalent rent +0.29%, rent +0.16%).
• In addition, the most volatile category of hotels contributed 0.08 percentage points to the core rate. Both hotel and airfare prices have returned roughly to their pre-pandemic trends, meaning that most of the inflationary pressure stemming from the recovery in travel service prices is now behind us.
• Inflation in used car prices slowed sharply (+0.2% after +10.5% in June), and some leading indicators point to a series of declines starting next month. ( https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html ). However, the chip shortage contributed positively to July’s headline figure through its impact on the new car (+1.7%) and auto parts (+1.1% nsa) categories. New car inventories are very low, and this category is expected to show further strength in the coming months.
• There were some signs of wage-price pass-through, particularly in categories that rely heavily on low-wage labor, with considerable increases in prices for food away from home (+0.8% nsa) and recreation admissions (+1.4% nsa). It is also worth noting that auto insurance prices fell by 2.8%, well beyond what can be explained by residual seasonality.
• The overall CPI rose 0.5%, in line with the consensus, reflecting strength in the restaurant sector and higher energy prices (+1.6%).

Looking ahead, pandemic-related price distortions are expected to continue to decline. However, the accelerating recovery in the labor market and the decline in persistent unemployment are putting upward pressure on the housing component, which accounts for one-third of the CPI basket. A rebound in the housing component is undoubtedly an upside risk to the inflation outlook.

However, it is also expected that the easing of price pressures in the transitory sectors driven by ​​by the pandemic will offset the higher inflationó, and therefore we do not expect core inflationary pressures to spike.

Therefore, inflation will eventually slow down fast enough that the Fed will not be forced to raise rates prematurely.Furthermore, since the Fed’s inflation criteria for raising rates have been met, the employment outlook is what will ultimately determine the path toward policy normalization.