CICC: Inflation fluctuates, the Federal Reserve may cautiously cut interest rates

According to the latest information from Zhitong Finance and Economics APP, CICC released a research report stating that the overall CPI in the United States in September seasonally adjusted increased by 0.2% month-on-month (same as the previous value of 0.2%), while the year-on-year rate fell to 2.4% (down from 2.5%); the core CPI increased by 0.3% month-on-month (same as the previous value of 0.3%), rebounding to 3.3% year-on-year (up from 3.2%), both higher than market expectations. The inflation rate did not further decline month-on-month, coupled with the strong non-farm data earlier, which may lead the Federal Reserve to slow down the pace of interest rate cuts. It is predicted that the Federal Reserve will cut interest rates by 25 basis points in November, and the guidance for future rate cuts will be more cautious. The baseline judgment on the U.S. economy is still a soft landing, but the road to a soft landing will not be smooth, and inflation data like today's may reappear. The recent sharp rebound in U.S. bond yields is a good reminder, indicating that the pattern of high dollar interest rates for a longer period of time remains unchanged (high for longer).

Key points from CICC are as follows:

The overall CPI in the United States slowed down in September, but the core CPI rebounded year-on-year. Both the month-on-month growth rates of the two have not further declined, indicating that downward pressure on inflation still exists.

Looking at the breakdown, the most closely watched supercore inflation by the Federal Reserve in September increased from 0.3% last month to 0.4%, accelerating continuously since June. Among them, prices for car repairs (+2.8%), car insurance (+1.2%), and medical services (+0.7%) accelerated. Airfare prices (+3.2%) saw a significant increase, while ticket prices for sports events (+10.9%) jumped noticeably.

The month-on-month growth rate of core goods prices rose to 0.2% (from -0.2% previously), mainly driven by the rebound in prices of new and used cars. Among them, the month-on-month change in prices for used cars rebounded from -1.0% to +0.3%, while new car prices rebounded from no growth to +0.2%. As mentioned last month, after experiencing software malfunctions in car sales in June, there has been some tightness in the inventory of both new and used cars, which may lead to a slight warming of prices in the coming months. This is also reflected in leading indicators such as the Manheim Used Car Index. Clothing prices in September (+1.1% month-on-month) also saw a significant increase, but prices for other goods such as furniture and appliances (0%), medical goods (-0.7%), entertainment goods (-0.3%), and education and communication goods (-0.7%) are still falling. This indicates that the supply of goods remains sufficient, and the likelihood of a sharp short-term price rebound is low.

Food prices in September rose by 0.4% month-on-month, mainly driven by the rebound in prices of home food from zero growth to 0.4%. Among them, egg prices have been steadily increasing over the past three months, with month-on-month growth rates in July, August, and September at 5.5%, 4.8%, and 8.4% respectively, while the month-on-month growth rate of fresh fruits and vegetables also rebounded to 0.9%. As the election approaches, the rebound in food prices that guarantee basic livelihood may not be favorable for Harris. The good news is that with the decline in oil prices, energy prices significantly fell in September, which will have a positive impact on reducing the cost of living for residents.

The month-on-month growth rate of rent in September fell to 0.3% (down from 0.5% previously). Among them, the growth rate of hotel prices plummeted from a significant increase of 2.0% last month to -2.3%. The seasonally adjusted month-on-month growth rate of primary residence rent fell to 0.3% (down from 0.4% previously), and the year-on-year growth rate of equivalent rents for landlords fell to 0.3% (down from 0.4%) The slowdown in rental inflation is a positive development, but it may continue to be sticky in the future. One reason is that with the influx of immigrants, their housing demand may continue to be released, providing support for rental inflation.

Inflation fluctuations, combined with the strong non-farm data before, may slow down the pace of Fed rate cuts. The Fed cut rates by 25 basis points in November, and the guidance for future rate cuts will also be more cautious.

Powell previously stated at the Jackson Hole meeting that labor is no longer a source of inflation risk, but the rebound in September's employment and inflation data may weaken this view. It is expected that the Fed will continue to cut rates, but at a slower pace. The continued rate cuts are because the Fed does not want to lag behind the curve, while the slower pace is due to concerns about a resurgence of inflation. Taking everything into consideration, a 25 basis point rate cut at the next meeting is a more appropriate choice for the Fed.

For the U.S. economy, the baseline scenario is still expected to achieve a soft landing, but the path to a soft landing will not be smooth, and inflation data fluctuations like today's may reappear. This also serves as a good reminder that it is not advisable to overly extrapolate U.S. economic data linearly. The recent sharp rebound in U.S. bond yields also indicates that the market's pricing of Fed rate cuts was too aggressive. The resilience of the U.S. economy remains, and the pattern of high dollar rates for a longer period has not changed (high for longer).

Finally, it is worth noting that future employment and inflation data in the coming months may be disrupted by a new round of strikes and hurricanes.

The unexpectedly sharp increase in initial jobless claims reported on Thursday may already partially reflect the impact of this. In this situation, the Fed will be more cautious, policymakers will pay more attention to the totality of data, and will not take action based solely on a single data point