The 'rate cut trade' is most afraid of 'accidents' - this data suddenly rebounds after two years

Housing costs have not yet truly slowed down, and sticky inflation still poses a threat to rate cuts.

In the August CPI data released overnight by the U.S. Bureau of Labor Statistics, the largest contribution to the rising inflation came from housing inflation: housing inflation rose by 0.5% month-on-month in August, higher than the 0.4% increase in the previous month, with a year-on-year growth rate of 5.2%, the first increase since March 2023.

Rent rose by 0.4% month-on-month in August, slightly lower than the 0.5% increase in the previous month. Meanwhile, owner's equivalent rent (OER) rose by 0.5% this month, higher than the 0.4% increase in July.

Additionally, expenses for dining out, hotel stays, preschool education, car insurance, and other prices have also seen varying degrees of increases.

Housing costs may continue to rise

For over a year, with the continuous decline in leading indicators of the rental market and the high inventory of apartment buildings in the rental market, economists generally expected the trend of rising rents to slow down, but the August CPI report broke this expectation.

According to a CICC analysis, if judged based on the Zillow Rent Index trend, it is likely that the CPI rent inflation in the next 6 months will be difficult to maintain below 0.2% month-on-month. This means that the anti-inflation effect from the slowdown in rents may be limited.

Luke Tilley, Chief Economist at Wilmington Trust, pointed out that housing supply is also becoming tight:

" The housing supply on the market remains very scarce, leading to high and continuous price increases. This will transmit to rental prices and other factors affecting the CPI."

However, Brian Rose, Senior Economist at UBS, believes that the rebound in housing costs this time does not represent a long-term trend.

"At some point, the growth will slow down because the speed of rent increases will not be fast, but it is difficult to say when this will happen."

He stated that the lag time of CPI data for the market is usually 12 months, but this report seems more like a delay of 18 months, coupled with the fact that OER is just a theoretical cost, the Fed should not overly focus on this data.

Rose pointed out that without housing, the inflation rate is only 1.1%, not 3.2%.

Will rate cuts trigger a surge in inflation?

Considering the upward trend in housing costs, will the upcoming Fed rate cut cycle reignite inflation? Currently, the market generally expects the Federal Reserve to cut interest rates four times within the year, totaling 100 basis points, with a total reduction of 250 basis points within a year.

Some opinions point out that the current year-on-year growth rate of the CPI is already highly similar to that of the past. If the Fed's rate cuts lead to a surge in inflation again, the United States may repeat the 1970s.