The consumer price index (CPI) data for June surprised to the downside but some of that surprise should reverse in July, Bank of America economists said in a Thursday note.

Economists forecast headline CPI to have risen by 0.3% month-over-month due mainly to a pickup in core services inflation and energy prices. This would keep the year-over-year rate unchanged at 3.0% and the NSA index printing at 314.993.

They also expect core CPI to have increased by 0.2% month-over-month.

“While this is not quite as low as June, it is in line with prior trend in deflation and should meet the Fed’s benchmark for beginning rate cuts in September,” economists said in the note.

The modest reversal in core CPI relative to last month is primarily driven by core services inflation.

According to BofA, this is due to two factors. First, core services excluding rent and owners’ equivalent rent (OER) edged down in June largely due to a plunge in airfares. However, for July, they expect the decline in airfares to be much more moderate at -1.0%. Second, shelter prices are expected to pick up to 0.3%, with lodging away from home rising 0.8% month-over-month. Elsewhere in shelter, the deceleration in rents and OER is expected to hold at 0.3%.

Overall, BofA expects core services to rise 0.3% month-over-month. While non-housing services inflation is likely to moderate over time due to cooling services wage inflation, a sustained period of deflation is unlikely, economists noted.

Last month’s deceleration in shelter came as a surprise, but not by much. In their previous forecast, BofA economists had rents and OER decelerating in August.

“Hence, we think the signal is real and expect the deceleration to hold,” they wrote.

They are forecasting some modest firming, but after rounding, this should still result in a 0.3% month-over-month rise for both components.

“Another month of 0.3% m/m increases in shelter should give the Fed further confidence that inflation is decelerating toward 2%,” BofA’s team continued.

Besides services, core goods prices are expected to have fallen for a fifth consecutive month, partly due to another decline in vehicle prices.

Should the July CPI report align with their expectations, economists said they would maintain their expectation for the Fed to start its cutting cycle in September and deliver 50 basis points in rate cuts this year.

“We acknowledge that financial markets are pricing in more than 100bp cuts for this year with some debate over the likelihood of a larger up-front cut or intermeeting move, but we do not think the current situation meets the bar for action.”

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