Consumer Price Index (CPI) data for June recorded a downward shock, but some of that shock is expected to reverse in July, Bank of America economists said in a note on Thursday.
Economists forecast headline CPI to rise by 0.3% month-on-month, due mainly to increases in core services inflation and energy prices. This would keep the annual rate unchanged at 3.0% and the NSA index at 314.993.
They also expect core CPI to increase by 0.2% month-on-month. "While this is not as low as in June, it is in line with the previous downward trend and should meet the Fed's benchmark for starting a rate cut in September," the economists said in the note.
The modest reading in core CPI compared to last month was mainly driven by core services inflation.
According to BofA, this is due to two factors. First, core services excluding rent and owner equivalent rent (OER) declined in June, largely due to a sharp decline in air freight fares. However, for July, they expect a more modest decline in air freight fares at -1.0%. Second, house prices are expected to increase by 0.3%, with stays away from home increasing by 0.8% month-on-month. Elsewhere in the residential category, the decline in rental rates and OER is expected to remain at 0.3%.
Overall, BofA expects core services to rise 0.3% month-on-month. While non-housing services inflation may level off over time due to lower service wage inflation, a sustained period of price declines is unlikely, according to economists.
Last month's decline in housing rates was a surprise, but not a huge one. In their previous forecast, BofA economists had expected rents and OER to decline in August.
"Therefore, we think this signal is true and expect this decline to remain," they said.
If the July CPI report is in line with their expectations, economists say they will maintain their expectation that the Fed will begin its rate-cutting cycle in September and implement a rate cut of 50 basis points this year.
