Our Hot Take on Surprisingly Cool CPI

As we predicted, headline July CPI came in negative on a month-on-month basis, driven by falling gasoline prices, sharply beating the consensus. Core CPI beat, too, logging its fourth-in-a-row sequential drop since March’s peak. OER was the only single component to make a substantial upside contribution, but it was less than last month’s, and based on the historical relationship to changes in home prices can be expected to lessen over the coming 18 months. Market-implied expectations for the September FOMC still point to the possibility of a 75 bp rate hike. We reiterate our out-of-consensus call for just 25 bp. Anything more than that would be a contractionary error – but if the Fed is going to make an error, it is nevertheless good news that the underlying reality of inflation is improving.