Slower CPI in the US in July ignited hope in markets:

Goldman Sachs is more reserved, not expecting core inflation to come down much from here.

Outlining 4 reasons:

1. the price of cars (a significant portion of core CPI) will likely stay high for months

  • inventories are likely to be depressed for the rest of 2022, given ongoing production problems and high demand continuing

2. Retailer excess inventory leading to discounts will hardly have any impact on prices

  • many retailers overstocked their inventories, GS estimates currently $20 bn—this translates to 3% of annual retail spending and 0.5% of total core goods spending. If all that excess inventory were put on sale at a markdown of 20% it would only translate to 0.1% of downward pressure on inflation

3. Discounting but will work instead as an offset since many retailers are still announcing inflation-driven increases

  • We do, however, continue to expect the strong dollar and easing supply-chain constraints to weigh on import prices later this year, and in turn on consumer goods prices by the first half of 2023

4. Consumers have made changes in their shopping behaviours, like switching to cheaper brands or pivoting to dollar stores to get their essentials. This is not reflected in the BLS’s data, creating substitution and outlet bias

  • “These biases caused Inflation to be understated earlier in the pandemic—when generous fiscal support and constraints on spending opportunities made consumers more willing to buy premium brands and shop at full-price retailers. But they will cause inflation to be overstated now and in coming months.”

GS expect a more sizable disinflationary impulse from core goods in 2023.

via Goldman Sachs