August CPI preview: Firmer trend to stick around

Summary

The July CPI indicated that tariffs are not the only challenge to the Fed finishing its fight against inflation. Sticky services inflation alongside the rebound in goods prices has stymied the disinflationary trend of the past two years and pushed inflation further from the FOMC's target. We expect the firmer trend to continue in August and look for the core CPI to rise another 0.3%, keeping the year-over-year rate at 3.1%. A pickup in food and energy prices should support the headline CPI as well, which we forecast to rise 0.3% over the month and 2.9% relative to a year ago.

Further ahead, we suspect higher tariff rates are here to stay as the administration has authority to increase customs duties beyond the International Emergency Economic Powers Act currently under legal scrutiny. The spillovers from stronger goods inflation to services inflation should remain limited, however. Physical inputs are only a small portion of service firms' overall costs, the jobs market continues to soften and inflation expectations remain generally anchored. We expect the core CPI and PCE to run around a 3% annualized pace over the next six months or so before resuming its downward trend in the spring of next year.

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