US: Another downward surprise in CPI data for June - Natixis

The US total CPI remained stable in June (below expectations) due to lower oil prices, unchanged food prices and another modest increase in core prices (+0.1% MoM versus +0.2% expected) and as a result, inflation lost 0.1pt to reach 1.6% while core inflation remained stable at 1.7%, notes Thomas Julien, Research Analyst at Natixis.

Key Quotes

“Looking forward, with forecasts of higher oil prices and further tightening in the labor market, we are still expecting inflation and core inflation to strengthen moderately on our forecast horizon. Therefore, we see no reason for the Fed to change its 2017 tightening plans following today’s report but the economy is clearly not overheating.” 

Consumer prices remained stable in June, below consensus expectations and ours (0.1% MoM). Energy prices declined (-1.6%) as expected while food prices stalled and core prices surprised on the downside on a monthly basis: +0.1% versus +0.2% for consensus expectations.”   

“The downward surprise on core prices is largely attributable to a softening in the dynamic of shelter prices. Otherwise, core services prices were slightly stronger on net (bit still moderate) while the price of medical care goods accelerated (see table). The price of cars continued to decline significantly. All in all, total inflation lost 0.1pt to 1.6% in June while core inflation remained stable at 1.7%.”

Retail sales: in a separate report, retails sales also surprised on the downside in the month of June. The decline was broad based and driven in part by a contraction in gasoline sales (expressed in value). Yet, the control group that is used to estimate GDP figures and more indicative of the trend, settled in negative territory, against expectations.”   

“Looking forward, given our oil price outlook and as the labor market will tighten further in the near term, we are still expecting inflation and core inflation to strengthen on our forecast horizon. After 1.3% in 2016, we forecast inflation to reach 2.2% this year and 2.5% next year.”

Fed: overall, Friday’s inflation and consumer reports both surprised on the downside but we still believe that the outlook for consumption remains positive as the labor market remains healthy. Therefore and as we expect inflation to move up, we see no reason for the Fed to change course in the short run. The fact that the economy is not overheating, reinforces our view that the Fed will wait until December to hike again and use the September meeting to announce the beginning of balance sheet reduction.”   

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