US CPI due for release at 8:30 AM

The July CPI is to be released today in the US. The expectation is for the an unchanged reading vs a gain of 0.7% last month.   The ex food and energy is expected to show a gain of +0.1% vs +0.2% last month. 

On a year on year basis the expectation is for a decline to -1.9% from -1.4%.  The ex food and energy or core CPI is expected to fall to +1.6% from +1.7%. 

 The inflation surge of 2008 peaked in July 2008 with a MoM gain of +0.7%. Over the next 5 months starting in August 2008, the MoM gains were +0.0%, +0.0%, -0.8%, -1.7% and -0.8%.  What does this mean going forward? 

It means that the YoY inflation rate will start to go back up unless prices fall by an equal month each month.  So for example, in October 2009, if the MoM CPI comes in at +0.1%, a modest increase, the YoY inflation will show a jump of around 0.9% since in October 2008 the -0.8% reading will drop out of the YoY calculation. 

All things being equal, if MoM inflation is shows no gain in the next 5 months, the YoY inflation measure will incrase roughly by the amount of the 5 months that will drop out from 2008.  That amount comes to a change of +3.3% (+0.0%, +0.0%, -0.8%, -1.7% and -0.8% = +3.3%). With YoY expected to come in at -1.9%, the YoY will rise to +1.4% by December (see chart below).   

The move in coming months may cause fear that inflation is returning and will likely get broadcast news comments to that effect.  However, in reality it is simply the unwinding of the oil and commodity induced gain of 2008.  The resulitng headline inflation rate will likely move closer to the +2.0% target that most central banks like to target.  Is this still too high given the slack economy?   That will be a point of discusssion in the markets through year end (and at FOMC meetings) and may make CPI the focus once again, wrestling control from the growth focus that has dominated the market over the last 9 or so months.

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