• Topline CPI grew at a 0.2% pace in July 2023 versus June
• Core CPI, less Food & Energy, in July 2023 matched the June result of a 0.2% monthly gain
• The highly touted Services less Rent of Shelter aggregate also grew at a temperate 0.2% in July 2023 versus June
• Housing inflation remains a sticking point for overall inflation trends, accelerating moderately to a 4.3% annualized pace in July 2023

Consumer Price Index (CPI) inflation was in line with PNC’s expectations for a 0.2% gain in July 2023, translating to a 3.2% year-over-year pace before seasonal adjustments. Although this result is up slightly on a year-ago basis versus the June result, it represents a deceleration from an on-the-ground, current conditions perspective. Base effects in energy prices, accounting for sharply declining trends last year, mean that even modest gains in newly published numbers will result in exacerbated year-ago numbers. But in fact, topline CPI has posted an annualized pace at or below 2.2% in four out of the five monthly results since the March 2023 numbers. The volatility in prices at this time last year tells us little about trends today, and so the annualized numbers of recent months are far more important than the year-over-year metric that remains above 3%. 

Core CPI prices, which exclude volatile food and energy components of consumer spending, were up 0.2% for a second consecutive month in July 2023. The resulting 1.9% annualized pace for Core CPI establishes the makings of a trend in this measure which is more closely aligned with the Federal Reserve’s preferred inflation measure (the Core Personal Consumption Expenditures Deflator). The July 2023 report’s core CPI result should reinforce the view that the Fed can begin to rely more heavily on hawkish rhetoric than on further interest rate hikes. This approach can make clear that the Fed will not allow inflation to reignite and that policy will remain restrictive in the face of strong consumer demand and wage growth but that past action can be allowed to continue to do the work that now appears to be bearing fruit. 

The Fed has stated their focus on the Services less Rent of Shelter component of the CPI report, given that consumers have been spending in the services category broadly speaking and that shelter price growth is “sticky” and thus will take time to cool even with effective monetary policy actions. The Services less Rent of Shelter aggregate posted an encouraging result for July 2023 at a 0.2% monthly gain, equating to a 2.1% annualized pace. There remains a current wave of higher energy prices and continued strong wage growth that will keep the threat of inflation from fully abating, but signs are so far pointing to the worst of that threat failing to materialize as the summer months’ spending season hits full swing.
 

Energy price gains moderated in July 2023, posting an overall 0.1% gain for the month. This follows a 0.6% rise in June. Gasoline prices similarly moderated in July, gaining only 0.2% for the month – a 2.1% annualized pace. Also on the household necessities front, Food at Home prices saw a bounce in July 2023, up 0.3% compared to June. This is also the first time since December 2022 that Food at Home prices outgrew Food Away from Home price growth for the month. With overall Recreation price inflation now at 3 consecutive months below a 2% annualized pace, there is hope that consumer habits are adjusting to higher prices. A slowdown in consumer spending before savings are fully depleted and consumer debt loads overwhelm household budgets offers hope that the expected downturn in U.S. economic growth can be minimized.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.