Where to focus first
US July inflation data, set for release on Wednesday, is generating divergent forecasts from major financial institutions. Goldman Sachs expects core CPI to rise slightly below the market consensus, with falling energy prices further dampening the headline figure. If the data comes in soft as anticipated, it could fuel increased expectations for a Federal Reserve rate cut.
According to Goldman Sachs' latest report, the firm projects a 0.19% month-over-month increase in core CPI, below the consensus estimate of 0.2%, corresponding to a 2.47% year-over-year rise, also lower than the expected 2.5%. For headline CPI, a 2.0% month-over-month decline in energy prices, driven by lower retail gasoline costs, is expected to push the overall monthly increase to just 0.05%, below the consensus of 0.1%. The annual headline rate is forecast at 3.35%, down from 3.53% in June.
HSBC Holdings PLC (HSBC) multi-asset strategist Duncan Toms noted that the June inflation data already showed a "surprisingly dovish trend," and its real-time forecasting model indicates that July data may again be moderate. Toms stated that if the data comes in soft, it could act as a catalyst to lower expectations for Fed rate hikes, potentially leading to a bull steepening of the US Treasury yield curve.
Three key subsectors: Auto, housing, and travel prices show divergent trends
The Goldman Sachs report highlights expected trends in three key subsectors. The auto sector presents a mixed picture. Supported by signals from used car auction prices, used car prices are expected to rise 0.5% month-over-month. New car prices, supported by stable dealer incentives, are projected to increase 0.1%. Car insurance prices are expected to fall 0.5%, reflecting a decline in premiums observed in the firm's online data sets.
The housing subsector is anticipated to remain moderate. Goldman Sachs expects owners' equivalent rent (OER) to rise 0.23% month-over-month, while the primary rent component is projected to increase 0.16%, both reflecting a continued cooling in the underlying trend of housing inflation. Housing, which accounts for roughly one-third of the core CPI basket, has a significant impact on the overall reading.
Travel services also show mixed signals. Driven by higher jet fuel costs from the July oil price rebound, Goldman Sachs expects airfares to rise 2.0% month-over-month. Hotel prices, however, are projected to fall 1.0%, as the demand boost from the World Cup for accommodation continues to fade. This effect was already evident in last month's CPI data, as related prices are measured at the time of booking.
Core PCE expected to run higher than CPI, with methodological changes adding extra noise
Goldman Sachs notes that despite the moderate core CPI reading, the corresponding July core PCE is expected to rise 0.26% month-over-month, significantly higher than the core CPI increase. This is primarily due to a large expected increase in the portfolio management component, which lags behind the second-quarter stock market gains.
Notably, the core PCE methodology is set for revision at the end of September. Goldman Sachs states that the new method will initially use wage data, which has a weaker correlation with stock prices, to estimate the portfolio management component. This could lead to an initial downward revision of the July core PCE to 0.21%. Once the third-quarter services survey data becomes available in December, the component will be revised again based on actual fee data, potentially pushing the July inflation reading back up. This methodological shift will introduce short-term volatility to core PCE readings, and investors should be mindful of the distinction.
Future inflation path: Baseline 0.2% expectation, upside risk from oil markets
Looking ahead, Goldman Sachs expects core CPI to maintain a monthly increase of about 0.2% over the coming months. Key supporting factors include continued cooling in housing inflation, a narrowing contribution from tariff-related price increases, and the fading pressure from earlier jet fuel price hikes on airfares.
However, Goldman Sachs also highlights upside risks. The report points out that if oil supply disruptions last longer than expected, leading to sustained higher oil prices, the inflation path could deviate significantly from the baseline forecast. As seen in the current airfare component, the transmission channel from oil price volatility to CPI is already quite direct, making this risk factor impossible to ignore.
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