US consumer price index (July 2015)

Consumer prices rose 0.1% m/m in July, slightly below the consensus estimate of 0.2%. After excluding the cost of food and energy, prices of core consumer goods increased by 0.1% during the month, also below expectations which called for a 0.2% gain.

"On a year-over-year basis, headline consumer price inflation rose to 0.2%, up from the 0.1% reading in June. Core CPI was up 1.8% y/y, unchanged from the month prior. Energy prices were up 0.1% m/m, as gasoline prices held steady despite the price of WTI declining by nearly 15% during the month of July. Food prices were up 0.2% on the month", notes TD Economics.

Core price growth remained entirely a services story in July. Non-energy related services were up 0.2% m/m, with both the cost of shelter (+0.4% m/m) and medical care services (+0.2% m/m) chipping in. 

The price of core consumer goods slid for the third consecutive month, though this was largely due to the pullback in the price of both new vehicles (-0.2% m/m) and used vehicles (-0.6% m/m). Prices of apparel (+0.1% m/m) recorded a modest gain in July, after declining in each of the previous three months.

There was little in the way of surprises in this morning's inflation report. Headline prices remained subdued on lower energy costs, while downward pressure from the dollar's rise on consumer goods continued to weigh on core CPI. That being said, the fact that July's decline in core consumer goods was entirely a result of falling vehicle prices, which could be related to incentives, while apparel costs turned the corner suggests that some of the headwinds from a higher USD might be starting to abate.

On the flip side, prices of domestically oriented core services - particularly the cost of shelter -  have continued to climb higher. To a large extent, these price gains are a result of limited rental supply, with vacancy rates currently sitting at a 29 year low.

Still, it's worth noting that there is more downward pressure on headline prices over the near-term. Indeed, gasoline prices increased by 0.9% in July despite the price of WTI falling by almost 15% in the month, reflecting a dynamic whereby gas prices can be somewhat sticky over the short-term, with pump prices only reflecting past changes in crude with a lag of several weeks.

"While these dynamics will continue to weigh on inflation over the near-term should the price of oil trend around current levels, favorable base effects will soon start to pull the year-over-year measure of headline inflation higher. While this is unlikely to materially manifest before the Fed's September meeting, we expect the Fed anticipation of these dynamics and its focus on core price growth should enable the Fed to take interest rates off the floor in September, while telegraphing a very gradual pace of rate hikes moving forward", says TD Economics.