July CPI print to confirm that inflation is slowing down: Wells Fargo

The upcoming July Consumer Price Index (CPI) report is expected to reinforce the trend of slowing inflation, according to analysts at Wells Fargo.

Despite not yet fully returning to the Federal Reserve's target, Wells Fargo anticipates the report will show significant progress.

The bank predicts that the headline CPI will rise by 0.2% in July, maintaining the year-over-year rate at a three-year low of 3.0%.

"The core CPI also looks set to advance 0.2% in July amid a rebound in some of the more volatile 'super core' components," the analysts noted.

They also expect the recent decline in shelter inflation to continue, alongside a reduction in prices for core goods. If these predictions hold, the 12-month change in core CPI would reach a fresh cycle low of 3.2%.

Looking ahead, Wells Fargo forecasts continued subsidence in inflation.

They highlight that labor costs are no longer a significant threat to the Fed’s 2% inflation target due to increased labor force growth and decreasing demand for workers.

Additionally, weakening consumer demand is putting downward pressure on prices, particularly for discretionary items, driving inflation back to pre-pandemic levels.

While core Personal Consumption Expenditures (PCE) inflation is likely to remain around its current rate through year-end, Wells Fargo expects the annualized pace of inflation to align with the Federal Open Market Committee's (FOMC) target.

Given the concerning labor market conditions, they anticipate the Fed will consider inflation close enough to target and may begin a rate-cutting cycle at its next meeting.