The CPI for July continued all of the trends I have been writing about for the past year or more:

 - Headline and core CPI continue to slowly decelerate. 

 - energy inflation is non-existent

 - shelter inflation remains very elevated but continues to declerate, following house prices.

 - all prices except for shelter coming in near or below the Fed’s 2% target

 - there are a few other problem children that don’t amount to too much

So let’s take these in order.

Both headline and core inflation rose 0.2% for the month. On a YoY basis, the former is up 2.9% YoY (blue) and the latter is up 3.2% YoY (red):

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Both of these are at their lowest YoY levels since 2021.

Now let’s add in CPI less shelter (gold), which was unchanged for the month, and is only up 1.8% YoY:

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CPI less shelter has been 2.3% YoY or less for the past 15 months.

In other words, for the Fed, the only reason not to treat inflation as well within its target zone is shelter.

Shelter (including actual rent, up 0.5%, and imputed rent of owned residences, up 0.4%) (red) increased 0.4% for the month and is still up 5.1% YoY - which is still lower than at any time in the past two years. It continues to decelerate as forecast by the sharp previous deceleration in home prices (as measured by the FHFA index, blue):

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At its current pace, shelter inflation will not have decelerated into the Fed’s target range for about 12 more months.

Energy inflation was nonexistent in July, and prices were only up 1.0% YoY:

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The former problem children of new (red) and used (blue) vehicle prices declined -0.2% and -2.3% for the month, are down -1.0% and -10.3% YoY respectively (shown as the change since right before the pandemic, below):

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The remaining problem children remain food away from home, up 0.2%, electricity, up 0.1%, and transportation services including vehicle maintenance, repair, and insurance, up 0.4%. On a YoY basis they remain up 4.1%, 4.9%, and 8.8% respectively:

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To reiterate what I have previously pointed out, the last item is a typical delayed reaction to the previous big increase in vehicle prices.

Although I won’t bother with a graph this month, I have previously pointed out that wages have grown at about the same rate as vehicle prices, so in “real” terms they are not that much of a problem any more. The Census Bureau’s own release summarizes my view, to wit: “the index for shelter … account[ed] for nearly 90 percent of the monthly increase in the all items index.”

If 2% inflation is a target and not a ceiling, the Fed has really had all the ammunition it has need for months. With the further YoY deceleration in July, it has even more. Unless there is an upside blowout surprise in August employment and wages, the real debate is likely to be whether the Fed cuts interest rates 0.25% or 0.5% at its September meeting.

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