What Economists Expect When Key Inflation Data Arrives Thursday: Market Looks For Clues On The Fed's Next Move

The Thursday release of the Consumer Price Index (CPI) report will bring pivotal data for markets as it will highly impact expectations for future Fed interest rates.

July CPI Inflation Rate: What Are The Expectations?

After experiencing 12 consecutive months of declining annual inflation, from its peak of 9.1% in June 2022 to 3% in June 2023, economists are now predicting a rebound in the inflation gauge to 3.3%.

Core inflation, excluding energy and food from the basket, is expected to remain steady at 4.8%, reaching the lowest level since October 2021.

Chart: US CPI And Core CPI Inflation Rate

Why Is Inflation Expected To Surge Again?

The sudden surge in inflation is attributed to what economists refer to as the “base effect.” In July 2022, the CPI Index remained unchanged month-on-month, resulting in a lower starting point for calculating the year-on-year variation.

As a result, the consensus economist view now anticipates a higher value of 3.3% for July 2023’s annual inflation rate.

What Are Top Wall Street Economists Predicting?

Let’s take a look at the predictions from some of the top financial institutions:

Morgan Stanley: In a recent note to investors, Morgan Stanley’s economists said they foresee the headline CPI advancing by 0.2% on a monthly basis and 3.3% annually. The core inflation is projected to grow by 0.2% month-on-month and 4.7% annually, slightly lower than the consensus.

“We expect another deflationary print for core goods,” Morgan Stanley wrote in the note, adding that the key draggers are expected to be used cars and trucks. The firm also sees a deceleration in energy and a slight uptick in food prices.

Bank Of America: Economists at Bank of America anticipate another soft CPI report for July, pointing to a moderation in inflation. The headline CPI is likely to increase by 0.2% on a monthly basis and 3.2% year-on-year. For core inflation, Bank of America forecasts a small 0.1% monthly increase, resulting in the year-on-year rate declining to 4.6%, the lowest since September 2021.

The drop in prices of cars and trucks, along with improvements in the supply chain, are expected to contribute to this soft inflation report.

Goldman Sachs: Goldman Sachs economists Manuel Abecasis and Spencer Hill predict that headline CPI inflation will rise by 0.16% in July, corresponding to a year-over-year rate of 3.17% (compared to the consensus of 3.3%). Core inflation is expected to show a 0.15% increase in July core CPI (vs. 0.2% consensus), resulting in a year-over-year rate of 4.66% (vs. 4.8% consensus).

They anticipate a 3% decline in used car prices and a 0.3% decline in new car prices in July, with residual seasonality affecting apparel and lodging prices, while shelter inflation remains steady.

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