Daiwa’s framing supports the broader post-CPI consensus that the Fed stays on hold in September, but the note’s real value is in the underlying detail rather than the headline call. The bank draws a clear line between areas still running hot, medical care and airline fares among them, and housing components that continue to track close to pre-pandemic norms, a distinction that matters because housing carries the heaviest weight within core services and is therefore the component the Fed watches hardest for a durable return to target. By stripping out rounding to show the true year-over-year trend continuing to ease on both headline and core, Daiwa is making the case that the recent Iran-driven inflation scare is fading from the data, even as the bank stresses that underlying inflation remains well above the FOMC’s 2 percent goal and that August’s data, due before the September meeting, could still shift the picture.
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Daiwa reads two consecutive soft CPI prints as evidence the Iran-driven inflation scare is fading, with a still-favourable housing trend doing much of the work.
Summary:
- Headline CPI rose 0.1 percent in July, in line with the median economist forecast, after a 0.4 percent decline the prior month, Daiwa noted
- Core CPI advanced 0.2 percent, also matching expectations, after rounding to no change in June
- On a less-rounded basis, annual headline inflation eased to 3.4 percent from 3.5 percent in June, while core inflation slowed to 2.5 percent, its softest pace since March 2021
- Daiwa said consumer inflation metrics have settled over the past two months following a bout of resurgent price pressure tied to the Iran conflict
- The bank said the results likely allow the FOMC to remain on the sidelines in September, though it cautioned that vigilance is still required with inflation well above target
- Core services prices rose 0.2 percent after a flat June reading, with medical care services up 0.6 percent and airline fares jumping 2.2 percent on the month
- Housing components stayed on recent trends, with both rent of primary residence and owners’ equivalent rent rounding up to 0.3 percent monthly gains, and their 12-month trends remaining consistent with pre-pandemic norms
- Daiwa said it was heartened by a second consecutive subdued CPI reading but stressed underlying inflation still sits well above the Fed’s price-stability goal, and that August employment and inflation data due before the September 15-16 meeting could still alter its view
Daiwa said Wednesday’s July CPI report, the second consecutive subdued reading, likely gives the Federal Reserve room to stay on the sidelines at its September policy meeting, even as the bank cautioned that underlying inflation remains well above target and that the picture could still shift before the decision is made. Headline consumer prices rose 0.1 percent for the month, matching the median forecast in a Bloomberg survey of economists, following a 0.4 percent decline in June. Core prices advanced 0.2 percent, also in line with expectations, after effectively rounding to no change the prior month.
Looking past the headline rounding, Daiwa highlighted that the underlying annual trend continues to ease on both measures. Headline inflation slowed to 3.4 percent year over year from 3.5 percent in June on a less-rounded basis, while core inflation eased to 2.5 percent, its softest annual pace since March 2021. The bank framed the two straight subdued readings as evidence that the resurgence in price pressure tied to the Iran conflict earlier this year is beginning to settle, a development it said should allow the Fed to hold rates steady in September, though it stressed that policymakers still need to remain watchful given how far inflation sits above the 2 percent goal.
Within the details, Daiwa flagged a split between areas still showing firm price pressure and those tracking more favourably. Core services prices rose 0.2 percent after a flat June reading, with medical care services climbing 0.6 percent on the month and airline fares jumping 2.2 percent, though both categories saw their annual rates ease slightly from June’s pace. Housing, the largest component within core services, continued on its recent trajectory, with both rent of primary residence and owners’ equivalent rent rounding up to 0.3 percent monthly increases. Daiwa said the 12-month trends for both housing measures remain in line with favourable pre-pandemic norms, a condition the bank views as necessary for inflation to eventually return sustainably to the Fed’s 2 percent target.
Taken together, Daiwa said it was encouraged by the back-to-back subdued CPI readings and views them as a sign that inflation may be starting to settle after months of elevated pressure. The bank was nonetheless careful to note that underlying inflation still sits well above the FOMC’s price-stability objective, a gap that may ultimately require a policy response of its own. For now, Daiwa said the latest data likely eases some of the pressure heading into the September 15-16 meeting, though it flagged that employment and inflation data covering August, both due for release before policymakers meet, could still alter that assessment.
Federal Reserve Chair Warsh
This article was written by Eamonn Sheridan at investinglive.com.
