On a year-ago basis, prices were up 8.5%, down from the 9.1% year-over-year pace registered in June. Falling gasoline prices were a major contributor to the slowdown in price growth. Motor fuel prices were down 7.6% in July on a seasonally adjusted basis. Through the first half of August there has been some additional relief at the pump, and we would not be surprised to see another sizable decline in motor fuel prices in next month's CPI release. Energy services inflation also eased to just 0.1% from 3.0% and 3.5% in May and June, respectively, as natural gas prices receded in early July
Core services inflation was the biggest surprise in the release, increasing just 0.4% in July (generously rounded up from 0.35%). Travel-related “reopening” categories posted some sizable price declines. Airline fares fell 7.8% in the month, prices for lodging away from home declined 2.7% and rental car prices dropped 9.5%. Most of these categories have seen significant inflation in recent months and a reversal was not entirely unexpected. That said, the magnitude of the drops are notable and contributed to the downside miss for overall inflation
We highly doubt the FOMC is ready to declare victory over inflation after just one softer-than-expected CPI report. Core CPI is still up 5.9% year-over-year and has grown at a 6.8% annualized pace over the past three months. The next CPI report will be released on September 13, just one week before the next FOMC meeting. A 75 bps rate hike at that meeting remains our base case, but the FOMC could go "just" 50 bps if that report provides additional evidence that inflation is slowing on a sustained basis. - Wells Fargo Economics
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