US: Core CPI to remain near current rate during H2 – Wells Fargo

Today US CPI data showed that the index rose 0.1% in June and is up 2.9% from a year ago, the highest rate since 2011.  While the lift to the year-ago rate from energy is expected to ease, inflation pressures continue to build and should keep the core at the Fed’s target, explained analysts at Wells Fargo.

Key Quotes:  

“Consumer price inflation came in a touch lower than expected in June, with the headline index rising 0.1 percent. Nevertheless, the CPI is up 2.9 percent over the past year, which is the strongest pace in more than six years.”

“While headline inflation has been boosted by the sharp rise in oil prices over the past year, the core has signaled that the underlying trend inflation has firmed. In May, the core PCE deflator hit 2.0 percent year-over-year for the first time since 2012, and, at 2.3 percent, the core CPI corroborates that inflation is running at the Fed’s target.”

“Further improvement in the 12-month pace of the core index is expected to slow in the second half of the year since base comparisons are getting tougher now that the slowdown of last spring/early summer is a full year behind us.”

“We expect to see core CPI, when measured on a 12-month basis, to remain near its current rate through the second half of the year before strengthening more in 2019. Solid consumer spending and minimal slack in the economy point to price pressures intensifying even though we do not anticipate much movement in the year-ago rate of core CPI over the next few months. Broadening tariffs, including the possibility of consumer goods getting hit directly, create some upside risk to our inflation forecast in the second half of the year, however.”