The U.S. Consumer Price Index came in more or less as expected for July, but economists are split on which way inflation is breaking.

The headline CPI dropped 0.3%, yet core inflation was up 0.2%. A large 5.6% drop in energy costs kept the headline subdued.

Economists agree that the lower headline number is good, but are split on the direction of the core rate. CIBC World Markets seems to buy the U.S. Federal Reserve Board’s view that core inflation will trend down following weak growth. BMO Nesbitt Burns is getting nervous that this hasn’t happened yet.

CIBC World Markets says, “As expected, the headline year-over-year rate is decelerating sharply on lower energy prices. And although the yearly core rate remains at a five year high, today’s report showed the first signs of price pressures easing in the service sector.”

BMO sees the opposite, noting, “The report showed no inflation in commodities markets, but lingering pressures in services. Hope springs eternal that core CPI will decelerate. Details today showed some odd, one-off price hikes that provided encouragement that underlying inflation is declining. Tobacco prices spiked 4.8%, the price wars in the information industries did not show up, and there was another pop in education, including tuition and books, which is hard to explain in the middle of summer vacation.”

CIBC sees inflation on a continued move down. “With recent evidence pointing to the possibility of a prolonged US.. slowdown, we expect to see inflation stay on this downward trend, as companies continue lowering prices to encourage consumers to keep spending.”

BMO says, “show me”. “The Fed is still on course to ease next week. But time is running out for core inflation to live up to the Chairman’s forecast of declining inflation in the second half. This could become an important issue by September,” it cautions.