• The core CPI for July rose 0.33% (month-on-month), falling short after four consecutive upward surprises. The composition 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 0.08pp to the core. Both hotel and airfare price levels have returned to roughly their pre-pandemic trends, meaning that most of the inflationary momentum 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 advance prices 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 the headline reading for July through its impact on the new car (+1.7%) and auto parts (+1.1% nsa) categories. New car inventories are very depleted, and we expect to see further strength in this category in the coming months.
• There were some signs of wage-price pass-through, particularly in categories that rely heavily on low-paid labor, with significant increases in prices for food away from home (+0.8% nsa) and recreation admissions (+1.4% nsa). It is also noteworthy that auto insurance prices fell by 2.8%, considerably more than can be explained by residual seasonality.
• The overall CPI rose 0.5%, in line with consensus, reflecting strength in restaurants and higher energy prices (+1.6%).

Looking ahead, pandemic-related price distortions are expected to continue to decline. However, the acceleration of the labor market recovery and the decline in permanent 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 higher inflation.and, therefore, we do not expect underlying inflationary pressures to spike upward.

Therefore, inflation will ultimately slow down quickly enough that the Fed will not be forced to raise rates prematurely.Furthermore, given that the Fed's inflation criteria for raising rates have been met, it is the employment outlook that will ultimately determine the path to policy normalization.