August CPI Forecast: Modest Inflation Increase Expected Amidst Varied Price Trends

A 0.45%MoM increase in shelter prices, similar to in July

Primary rents and owners’ equivalent rent should continue to slow modestly in August, with a 0.44% increase in primary rents and 0.46% OER in our forecast. Current shelter prices in CPI will reflect the easing in rents and house prices that already occurred in 2022/early-2023 and we expect prices to slow to around ~0.3%MoM by the end of the year. But we would caution that the quick and substantial rebound in home prices over the last few months could limit how much shelter prices will slow and could even suggest upside risks in the second half of 2024. This would be particularly true for owners’ equivalent rent, which could remain stronger than primary rents as in July data. Higher home prices should imply upward pressure on rents for single family homes, which will reflect the majority of the OER sample.

 

- We have penciled in a modest 0 4% increase in lodging away from home in August although with possible downside risks. There appears to be some modest residual seasonality leading to weaker hotel prices in the summer months, but we would still see strong travel demand, especially into the holiday season of greater domestic travel, as putting upward pressure on hotel prices.

 

A stronger 0.39% increase in core non-shelter services prices

The key difference between our August CPI forecast and the 0.16%MoM core prints of June and July is an expectation for a bounce-back in airfares. Admittedly, we have been expecting a rebound in airfares for a number of months that has yet to materialize, with 8% monthly declines in June and July. We suspect this has been due to a combination of a number of factors including 1) falling energy prices, 2) a shift in usual seasonal patterns for travel and booking of travel, 3) a selection of flights in the CPI sample that could be somewhat stale to reflect current travel patterns. In August, both factors 1 and 2 would suggest stronger airfares, with energy prices rising again and a large positive seasonal factor. Given already substantial declines in July, an expectation that prices will not fall as much in August leads us to pencil in a 4% seasonally adjusted increase.

Other transportation services prices apart from airfares could also be somewhat stronger in August, including an increase in car rental prices after months of declines and a increase in intracity transportation, with further upside in September, reflecting New York City area fare increases.

Headline CPI should rise a substantial 0.6%MoM and 3.7%YoY, largely reflecting the increase in retail gas prices.