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(Bloomberg) — Forecasters expect a monthly report on US consumer prices to show another modest increase last month, reinforcing widespread expectations for a Federal Reserve interest-rate cut in September.

The figures, to be published Wednesday by the Bureau of Labor Statistics, will probably show the consumer price index, and a “core” gauge excluding food and energy, both advanced 0.2% in July, according to the median estimates in a Bloomberg survey.

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Such a reading would mark the smallest three-month increase in core inflation since early 2021, just before the broad rollout of Covid-19 vaccines that spurred a reopening boom in the US economy.

“Bloomberg Economics expects July’s CPI to be soft, driven by a long-anticipated slowdown in housing rents, a decline in used-car prices, and discounts in discretionary services categories as consumers rein in spending,” chief US economist Anna Wong said in a preview of the numbers.

Here are the key components to watch in the report:

Rents

Core inflation excluding shelter had largely come back to pre-pandemic levels by the end of 2023. But rapid rent increases in the CPI data continued through most of the first half of 2024. In June, however, they decelerated sharply, notching the smallest monthly rise since mid-2021.

Economists expect that slower pace to continue in the months ahead, helping keep a lid on overall advances in the CPI. Rents comprise the biggest category in the index, so they have an outsize impact in determining the broader trend.

“June’s downshift in primary shelter looks to be sustainable based on the BLS’s New Tenant Rent Index and private sector vacancies,” Sarah House and Aubrey George, economists at Wells Fargo, said in an Aug. 7 preview of the numbers. “We look for another 0.3% rise in July and for primary shelter to increase 0.25%–0.30% per month through the end of the year.”

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Used Cars

Within the goods components of the index, analysts remain focused on used cars in particular. Given their weight in the index, a drop in July could help extend a streak of declines for the broader core goods basket, which has fallen in 12 of the last 13 months.

While a widely-tracked measure of wholesale used vehicle prices published by Manheim rose in July, the CPI component tends to only follow with some lag — and the July increase was only the first since January.

“Used car auction prices have now fallen 26% from their peak versus 18% for CPI used car prices, suggesting that there is room for the CPI measure to fall further,” Goldman Sachs economists Ronnie Walker and Jessica Rindels said in an Aug. 12 preview of the numbers.

“We expect a modest decline in new car prices, as dealer promotional incentives rebounded following the end of disruptions to dealer software systems in June.”

Airline Fares

Airfares were an important factor in the downside surprise for the core CPI gauge in June’s report, with the 5% decrease marking the largest decline in a year. That helped a measure of core services costs excluding rents register back-to-back monthly drops for the first time since mid-2021.

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The July reading is a source of uncertainty, with arguments both for increases and decreases, according to Citi economists Veronica Clark and Andrew Hollenhorst.

“We were surprised by the weakness in airfares last year, which fell even below pre-pandemic levels on a seasonally adjusted basis. We had been expecting some pickup in airfares this year as the sample of flights priced in CPI last summer possibly reflected flights with low summer demand,” Clark and Hollenhorst wrote in an Aug. 12 preview of the report.

“But as travel demand broadly could be softening more than last year, airfares could remain weak.”

Bond Markets

Bonds advanced across the board on Tuesday after US data showed producer prices rose less than forecast in July, as traders who’ve endured some dramatic swings in recent sessions set themselves up for big gains heading into Wednesday’s CPI report.

“The market is leaning in a very dovish direction” and “anticipating soft inflation numbers which allow the Fed to begin to cut rates,” Matt Luzzetti, chief US economist at Deutsche Bank, told Bloomberg Television on Tuesday after the producer price report.

—With assistance from Edward Bolingbroke.

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