CICC: Inflation stickiness does not support significant easing by the Federal Reserve

The overall CPI in the United States rose by 0.2% month-on-month in August (previous value 0.2%), with the year-on-year growth rate falling to 2.5% (previous value 2.9%), lower than market expectations; the core CPI rose by 0.3% month-on-month (previous value 0.2%), with the year-on-year growth remaining steady at 3.2%, in line with market expectations. Although the overall CPI continues to slow down, the core CPI has rebounded for the second consecutive month on a monthly basis, especially with housing rents and core services inflation (supercore) still attracting market attention.

We believe that this inflation data essentially locks in a 25 basis point rate cut by the Federal Reserve in September, but does not support a significant easing. Our base case scenario remains a soft landing for the U.S. economy, albeit this time with sticky inflation, which may lead to the Federal Reserve cutting rates "on and off." This also means that the current market pricing for a significant rate cut may be overly aggressive, with potential adjustment risks in the future.

The overall CPI in the United States slowed down in August, but the core CPI rebounded for the second consecutive month, indicating that inflation stickiness persists. Looking at the components, the main sources of inflation stickiness in August were twofold. Firstly, the inflation rate for housing rents rebounded from 0.3% in the previous month to 0.5%. Specifically, primary residence rents rose by 0.4% seasonally adjusted (previous value 0.5%), equivalent rents rose by 0.5% (previous value 0.4%), and hotel prices surged from a 0.2% increase in the previous month to 2.0%.

The stickiness of housing rent inflation aligns with our previous commentary in "Slowing Inflation Supports Fed Rate Cut in September," predicting that if we look ahead based on the Zillow Rent Index trend, it may be difficult for the next 6 months' CPI housing rent inflation to remain below 0.2%. This implies that the anti-inflationary effect from slowing rents may be relatively limited.

The other source is the non-housing core services inflation (supercore) that the Federal Reserve is most concerned about. The month-on-month growth rate of this indicator expanded from 0.2% in the previous month to 0.3%. Among them, airfare prices, after a sustained significant decline, rebounded strongly in August with a month-on-month growth rate of 3.9%, driving the overall transportation services month-on-month growth rate to rebound from 0.4% in the previous month to 0.9%. Medical service prices fell by 0.1% month-on-month, with hospital and related services rising by 0.4%, but dental medical services (-0.6%), ophthalmic medical services (-0.5%), and home elderly care services (-0.2%) all declined month-on-month.

The good news is that core goods inflation remains subdued, falling by 0.2% month-on-month, although the decline narrowed compared to the 0.3% in the previous month. As mentioned in our report "Economic and Policy Path to a Soft Landing," the continuous repair of supply chains and the supply-side factors such as China's cheap exports to the U.S. have suppressed U.S. goods inflation, bringing hope for a soft landing.

Furthermore, prices of goods such as televisions (-2.8%), smartphones (-1.4%), computers (-0.4%), furniture and bedding (-1.0%), and medical equipment (-0.6%) continued their downward trend, many of which are China's advantageous export items or benefit from China's abundant supply capacity. The price of used cars fell by 1%, narrowing the decline from 2.3% in the previous month The new car prices rose by 0.1%, rebounding from a 0.3% decline last month. After experiencing software malfunctions in car sales in June, there has been some tension in the inventory of both used and new cars, which may lead to a slight price recovery in the coming months.

We believe that this inflation data essentially locks in a 25 basis point rate cut by the Federal Reserve in September, but does not support a significant easing. Although the month-on-month growth rate of core CPI rebounded in August, the three-month annualized growth rate of core CPI is currently at 2.4%, while the six-month annualized growth rate is only 2.0%, showing an overall downward trend. In addition, we expect that the recent significant drop in oil prices may drag down energy prices in the fourth quarter, and factors such as China's continued export of cheap goods and an increase in labor supply due to immigration will continue to improve supply, easing the pressure of price hikes.

Therefore, our base case scenario remains that the United States is likely to achieve a soft landing, albeit with sticky inflation, leading to inflation stabilizing around 3%. This means that the Federal Reserve can still cut rates, but the magnitude of the rate cut will not be too large, and the pace will not be too fast. Currently, the market has priced in a rate cut of about 100 basis points by the end of the year, which we believe may be overly aggressive.

Chart 1: Core inflation in the United States continues to show a slowing trend

Source: Haver, CICC Research Department

Chart 2: Rent inflation rebounded to 0.5% month-on-month

Source: Haver, CICC Research Department

Chart 3: Non-rent core services inflation rebounded to 0.3% month-on-month

Source: Haver, CICC Research Department

Chart 4: Core goods inflation still maintains negative month-on-month growth

Source: Haver, CICC Research Department

Dr. Liu Zhengning also contributed to this article.

Authors: Xiao Jiewen (S0080523060021), Zhang Wenlang, Source: CICC Insight, Original Title: "CICC: Sticky Inflation Does Not Support Significant Easing by the Federal Reserve"