Data due this week will show core inflation in the US ran at two and a half times the Fed’s target last month, underscoring the case for another rate hike later this month.

Core prices probably rose 5% in June from a year ago, economists reckon. That’d be the slowest pace since November of 2021, the month before the Fed jettisoned “transitory” as a description of inflation. On a MoM basis, the core measure is seen posting a 0.3% increase following six consecutive 0.4% monthly gains (rounded up).

The headline YoY CPI print will likely look a semblance of normal. Consensus expects 3.1%. The national news media will focus on that, as will the Biden administration. The Fed, though, will fret over maddeningly slow progress coaxing core back to more palatable levels.

Fed critics and those disinclined to “bright side” analysis (I’d count myself in one, and sometimes both, groups) should be careful to avoid hypocrisy. It’s certainly true that core prices (or, I suppose, “core services excluding housing” if you’re the Fed in 2023) can be a better guide for policymakers, but critics frequently joke that the more narrow the metric, the more farcical from the perspective of everyday people. Something like this: “Inflation is low if you don’t count gas, food and shelter.” Jerome Powell himself was very vocal about the fact that Main Street “doesn’t even know what ‘core’ is.” So, it’d be hypocritical (albeit entirely predictable) for critics to focus exclusively on core now that headline inflation is within a point of target.

The better (where that means more honest) line of criticism is to simply state the obvious: Headline inflation is volatile, which is why we created “core” measures in the first place, and we can’t depend on the headline measure to keep receding. In the near-term, more challenging comps and geopolitical uncertainty could lead to an inflection back in the wrong direction for the overall gauge, and over the medium- to longer-term, the disappearance of key structural disinflationary enablers, voter demands on fiscal policy, rearmament, on-shoring and socioeconomic shifts could bias inflation higher.

As ever, macro watchers will eye the CPI report for the contribution from used cars and everyone (including and especially the Fed) is anxiously waiting for evidence of shelter disinflation, which is allegedly a foregone conclusion+.

“Moderating shelter costs remain in focus with any downward pressure on OER contributing to the building sense that the Fed’s actions are seeing some success in reestablishing price stability,” BMO’s Ian Lyngen and Ben Jeffery said. “One report doesn’t make a trend, however peak inflation was clearly last year’s story; the market has shifted toward the peak employment angle and as such cooling core-CPI will be in keeping with investor expectations.”

Lyngen and Jeffery noted the ongoing deceleration in CPI-derived versions of the core services ex-housing metric favored by officials, shown above.

The inflation figures come on the heels of June’s US jobs report, which was mixed. It was “hot” to the extent the headline print would count as solid in any context outside of the pandemic, the unemployment rate moved back lower to a rock-bottom 3.6% and average hourly earnings surprised to the upside. But solid as it would be in more “normal” times, the headline represented a rare downside miss to consensus and revisions lopped more than 110,000 off the prior two months. That wage growth didn’t moderate further was another reminder that the fight to wrestle core inflation lower will be a long one.

July’s FOMC meeting is almost fully priced for a hike, and markets have generally come around to the “higher for longer” mantra+, although pricing for the trajectory of rates going forward is very fickle and prone to sharp, overnight “adjustments,” as we saw in mid-March.

“While Fed officials are likely to maintain the bias for additional policy tightening, we think the combination of clearly softening underlying inflation and gradually easing labor market conditions will allow the Fed to extend a pause after September,” TD Securities’ Oscar Munoz and Gennadiy Goldberg remarked, before conceding that markets “still can’t fully discard the possibility that the Fed pushes through a second rate increase, particularly toward the end of the year if the economy fails to lose sufficient speed by then.”

Of course, if inflation does continue to moderate, policy will become mechanically tighter, with the caveat that ongoing gains for equities and any new momentum in housing prices could offset that dynamic and push inflation back higher through the wealth effect channel.

Also on deck in the US this week: NFIB, PPI, the preliminary read on University of Michigan sentiment for July and a host of Fed speakers including Barkin, Barr, Bostic, Bullard, Daly, Mester and Waller.

Elsewhere, the Bank of Canada may raise rates again after restarting hikes following a two-meeting pause. Wage figures are due in the UK, where the Bank of England is staring down a multi-faceted crisis. And China will report trade data.