Morgan Stanley’s latest research indicates that the Consumer Price Index (CPI) for August has presented a minor upside surprise, particularly driven by strength in services. Despite this, the firm is sticking to its prediction of a 25 basis points rate cut in the following week, as the potential for larger cuts this year due to lower-than-expected inflation seems unlikely now.
The report highlights that core CPI rose by 0.28% in August compared to the previous month’s 0.17%. Notably, the Owner’s Equivalent Rent (OER) and rent of primary residence saw significant increases of 0.50% and 0.37% respectively, marking the most substantial surprises in the data. However, the analysis suggests that these spikes may be more due to temporary factors rather than significant trends.
While core services excluding housing remain subdued, there has been a slight reversal in recent softness. The report dismisses these fluctuations as noise, attributing them to factors like changes in motor vehicle insurance prices. On the other hand, core goods prices experienced a decline, particularly in used vehicle and household goods prices.
Looking at the data on a three-month annualized basis, core CPI showed an increase from 1.6% to 2.0%. Based on the CPI insights, Morgan Stanley forecasts a rise in core PCE inflation for August and a slight dip in headline PCE figures. The anticipated year-on-year core PCE is projected at 2.72%. The firm plans to update its forecasts following the release of the Producer Price Index (PPI) data.
