Data Preview & Forecast
MUFG forecasts July 2026 headline CPI at 0.12% MoM (3.4% YoY) and core CPI at 0.17% MoM (2.4% YoY), in line with the median estimate from Bloomberg contributors.
Since 1980, there were 21 months where MoM growth in core CPI was either 0 or negative. In 15 of the 21 months that followed, growth was <=0.1%, highlighting how months of no inflation are typically followed by continued weakness.
What to watch out for: Motor vehicle insurance prices declined by their largest percentage in history in both May and June. Combined with wireless phone services, MoM CPI was brought down by ~0.1% points last month. A normalization in July supports a modest rebound in overall core CPI.
Market Thoughts
Base-case: Given the micro rates rally before this CPI release, we expect only a minor rates rally (3-5bps) to unfold if our forecast of a rounded up 0.2% MoM core reading materializes, as markets would be concerned that a 0.2% is still enough to keep the Fed in the game.
Upside risk: We cannot ignore the risk of a potential snapback in CPI with a core reading of 0.3%. Alternatively, if supercore rises faster, that might capture markets attention, triggering a sell-off by pushing up hiking expectations for the September FOMC meeting.
Downside risk: Inflation data has taken on greater importance in the macro space, so a 0.1% core reading, especially following a 0% last month, would ease some of the pressure on the Fed to raise rates this soon. Unlike the reaction after the weak & unusual July NFP, we expect a decent rates rally of 5-8 bps if core CPI comes in that soft.
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