The whole market is focusing on non-farm payrolls, beware of inflation shooting a "backfire"

As the US inflation steadily approaches the 2% target this year, labor market risks seem to be the only obstacle to the Fed's rate cut. Currently, the market is focusing on the Fed's September FOMC meeting, believing that the non-farm payroll data released on Friday will be an important window for predicting the extent of the rate cut.

Deutsche Bank analyst Henry Allen recently published a research report stating that despite significant progress in combating inflation over the past two to three years, both US PCE inflation and Eurozone CPI inflation have returned to the "2% level," but it is still too early to rule out inflation risks.

The report identifies four main reasons.

First, as major central banks around the world gradually enter a loose cycle, the growth rate of money supply is rising again, pushing up price risks. Data shows that the real yield on 10-year US Treasuries has fallen by more than 50 basis points from its peak in late April.

Second, there are still upward risks in inflation sub-items with high stickiness.

The report gives an example that the Atlanta Fed's inflation index divides inflation into two categories: elastic inflation sub-items and sticky inflation sub-items, with the former having relatively fixed prices and high stickiness; the latter has frequent price changes and is relatively flexible. Whether from a 3-month or 12-month interval perspective, sticky inflation sub-items are the main factors driving overall inflation higher, with flexible inflation sub-items even in deflationary territory.

The same is true for the European region. The latest CPI data shows that the Eurozone's August goods CPI growth rate was only 1.4%, while the services CPI growth rate rose to 4.2%, the highest level since October last year.

Third, geopolitical shocks may push up commodity prices.

In recent years, geopolitical conflicts worldwide have frequently pushed up energy and shipping prices.

The report states:

We have seen a lot of experience on how geopolitical events can trigger supply shocks and push up inflation without warning. Given the many risks in the current geopolitical landscape, this upward price risk is worth noting.

Finally, the report believes that due to the impact of the epidemic, global real yields have risen, and government deficits and fiscal stimulus costs have also increased.

In other words, monetary policy may need to provide more economic stimulus than in the past to address potential growth shocks in the future, which could more easily directly drive up inflation.