The Zhitong Finance App learned that CICC released a research report saying that it is expected that the Federal Reserve may remain on hold in October, and that the next rate hike may be in December. However, a slowdown in the pace of interest rate hikes does not mean that monetary policy is shifting towards easing. Considering that the US economy is growing steadily, the labor market remains resilient, and inflation is still high, the Federal Reserve may maintain a tight monetary policy stance for a long time. Within the next year, it is unlikely that the Federal Reserve will switch to cutting interest rates, and the high interest rate environment will still be the new normal that the US economy and financial markets need to adapt to.
The US CPI quarterly rose 0.6% month-on-month and 3.7% year-on-year; core CPI rose 0.3% month-on-month and 2.6% yoy, all rebounded from last month and exceeded market expectations. Price increases come from a wide range of sources, and are driven by energy, core commodities, and rents. High oil prices have exacerbated energy inflation. Consumer resilience and AI investment demand support commodity prices, while rent stickiness has limited the decline in service inflation. In terms of monetary policy, the rebound in inflation has strengthened the need for the Federal Reserve to continue to raise interest rates, but due to the recent rise in US bond yields and the strengthening of the US dollar, financial conditions have been partially tightened, and the Federal Reserve may remain patient. CICC expects that interest rate hikes may still be suspended in October and will act again in December. However, the slowdown in the pace of interest rate hikes does not mean that monetary policy is shifting towards easing; the Federal Reserve may still maintain a tight policy stance in the coming year.
This rebound in inflation came from a wide range of sources, and was driven by energy, core commodities, and rents. On the energy side, as international oil prices continued to remain high, the energy segment seasonal adjustment rose 5.2% month-on-month in September. Among them, gasoline rose 9.1%, contributing more than half of the overall CPI increase. Fuel prices surged 15.3% month-on-month. Looking ahead, the geographical situation in the Middle East has yet to ease. CICC believes that the pressure on energy inflation will be difficult to ease in the short term, or will continue to be reflected in the October CPI data.
Core commodity inflation has regained its upward trend, reflecting that consumer demand is still resilient, and inflationary pressure related to AI is still ongoing. Excluding energy and food, core commodity prices rose 0.3% month-on-month in September, mainly driven by rising prices for toys (+4.2%), clothing (+0.3%), and used cars (+0.7%). Toys and clothing may be driven by new school season and fall clothing, while the increase in used car prices reflects that residents have maintained a certain level of purchasing power in an environment of high fuel prices.
At the same time, the upward pressure brought about by the data center construction boom continued: prices of computer software and accessories rose 0.4% month-on-month, and the year-on-year increase was still as high as 28.4%; prices of computers, peripherals, and smart home assistants rose 1.4% month-on-month, reaching 9.7% year-on-year increases. Both continued to record high year-on-year increases.
Rental inflation is becoming more sticky, and service inflation is being prevented from cooling down. The housing segment rose 0.4% month-on-month in September. Among them, owners' equivalent rents rose 0.3% month-on-month, and rents for major residences rose 0.2%. Due to the high weight of rents in the CPI basket, there is resistance for core inflation to converge towards the 2% target. However, considering that mortgage interest rates have continued to rise recently and the real estate market is weak, CICC believes that rent increases will be sustainable or limited. Forward-looking rent indicators also show no signs of continuing price increases.
Inflation in core non-rent services was relatively moderate, and wireless telephone services leveled off. The price of non-rent core services (supercore) rose 0.4% month-on-month in September, down from 0.5% last month. Among them, wireless phone service prices remained flat month-on-month (surged 5.9% last month) and no longer constituted a month-on-month drive, indicating that this price increase is more likely to be one-off. Transportation service prices rose 0.6% month-on-month, up from 0.5% last month. Among them, ticket prices rose 1.2%, indicating that rising fuel prices are still putting pressure on transportation costs.
After the CPI was announced, the US dollar strengthened, and both US stocks and gold declined markedly. The market reacted strongly because inflation exceeded expectations and broke the market's previous judgment on the pace of interest rate hikes, and investors began to re-evaluate the possibility that the Federal Reserve would raise interest rates in October. CICC believes that although it is necessary for the Federal Reserve to continue to raise interest rates, the next rate hike will not necessarily occur in October.
First, since the interest rate meeting in September, the Federal Reserve has only obtained a set of non-farm payrolls and a set of CPI inflation data. Although today's inflation data supports further policy tightening, there may be disagreement within the Federal Reserve as to whether to raise interest rates for two consecutive meetings.
Second, recent long-term US bond yields have risen further, compounded by the strengthening of the US dollar, and financial conditions have been tightened to a certain extent. Interest rate sensitive sectors such as real estate are being suppressed, which means that the market has actually performed part of the monetary tightening function, helping to reduce the pressure on the Federal Reserve to take immediate action and buy more time for it to observe inflation trends.
Recent statements by Federal Reserve officials also reflect this trend. Federal Reserve Governor Waller said that it is still necessary to raise interest rates further in the future, but there is still some flexibility in the timing of interest rate hikes; interest rate hikes do not have to be carried out in continuous meetings, but they should be implemented within an acceptable period of time. New York Federal Reserve Chairman Williams said it might be appropriate to raise interest rates again this year, but it remains to be seen whether further action is needed thereafter. Federal Reserve Governor Bowman believes that there is still time to evaluate changes in financial conditions and economic conditions before deciding whether to continue raising interest rates [3]. Overall, Federal Reserve officials have not denied the need to continue raising interest rates, but they tend to be patient with the pace of rate hikes.
Chart 1: The year-on-year increase in CPI growth rate in September
Source: Wind, CICC Research Division
Chart 2: Crude oil prices remain above $100 per barrel
Source: Wind, CICC Research Division
Chart 3: Core commodity inflation regains upward trend
Source: Haver, CICC Research Division
Chart 4: AI-related inflationary pressures continue
Source: Haver, CICC Research Division
Chart 5: Housing rent inflation is becoming more sticky
Source: Haver, CICC Research Division
Chart 6: Non-rent core service inflation has declined somewhat
Source: Haver, CICC Research Division