Sticky Services Pose Challenge for Inflation-Sensitive Fed

Next week marks a significant moment for the US Federal Reserve as it awaits crucial inflation data. The July Consumer Price Index (CPI) print is expected to show core CPI rising by +0.2% month-over-month, which would bring down the year-over-year pace to 2.4%. Headline inflation is forecasted to come in at a relatively subdued +0.1% m/m (+3.3% y/y), thanks in part to a continued decline in gasoline prices.

Core goods have been contributing positively to headline inflation, with three consecutive months of flat to negative growth. However, the authors expect core services inflation to remain sticky due to elevated wage growth and demographic factors, such as Baby Boomers' demand for services being less sensitive to wage income changes.

The Core Producer Price Index (PPI) is unlikely to experience the same relief as core CPI, with a forecasted +0.3% m/m increase in core PPI due to ongoing pressures from services including transportation and warehousing. Trade services are seen as a wild card, particularly after the unexpected jump in the ISM Services prices paid index in July.

Finally, retail sales data will be released next week, with a forecasted decline of -0.3% m/m in nominal retail sales due to retreating gasoline prices and light motor vehicle sales. However, excluding autos and gas, spending is expected to remain positive, indicating a resilient consumer picture.