U.S. Week Ahead

Focusing on August, core goods inflation is unlikely to be problematic. July’s month-over-month spike in computers, peripherals, and smartphones was likely a one-off in response to a one-time Apple price hike. And new car prices have remained mostly flat this year despite tariffs, which we expect will continue in August. But the Manheim Used Motor Vehicle Value index suggests used cars are set to rise. Tariffs have had a meaningful impact on auto parts, a key input in the used car market, and this is also spilling over to maintenance and repair services. We expect core services will continue to be sticky (we look for a rise of 0.26% m/m). Problematically, we think housing disinflation is likely approaching its floor this year. Alongside sticky housing, the continued spike in jet fuel prices will drive airfares higher, pushing up transportation services.

In the months ahead, inflation should remain the Fed’s primary concern as many recent speakers have shifted towards a more hawkish stance and rightly so. The combination of tariffs, energy prices, and a tight labor market all point to pressures that are heading in the wrong direction. Consumer perceptions of inflation expectations remain elevated as evidenced by the University of Michigan and Conference Board surveys, both of which worsened in August. Concerningly, around half of the CPI basket is reporting price growth at-or-above 3% y/y. For now, energy has not bled into core inflation that much. But the problem is that there is no guarantee that this containment persists – a concerningly high share of businesses are reporting increases in prices paid in both the ISM Manufacturing and ISM Services surveys. And PPI remains elevated at 4.7% y/y, with the risk that energy pushes that pace higher in the months ahead.

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Leading indicators for housing suggest limited disinflation

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ISM surveys flag input cost pressures for PPI

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We also get PPI next week, another inflation metric that is concerning. The pace of headline PPI is set to re-accelerate (+0.4% m/m) on oil, and core PPI will likely move sideways at +0.2% m/m. Within the PPI report, we will be watching finished core consumer goods for signs of impending pressures in core goods CPI. We continue to watch trade services as an indicator of producer margins. To date, we have not seen persistently negative trade services PPI prints, which suggests that for the most part, firms have been able to pass off higher input costs to consumers. This adds conviction to our view that if energy and tariff pressures are passed through, the path of core inflation will stall and risk a re-acceleration. That would be a trend the Fed can’t look through.

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About the authors:

Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s US economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a Senior US Economist at RBC. She is responsible for generating RBC’s US economic forecasts across GDP, employment, and inflation, and providing macro commentary through publications, presentations, and the media.

Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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