Shen Wan Hongyuan: US CPI in August is in line with expectations, and the probability of interest rate hikes in September rises to 87%

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that the September interest rate hike was basically “fixed on the plate,” and that the market focus may shift to the path of future interest rate hikes. The August CPI data raised the interest rate hike forecast for September to 87%. According to historical rules since 2015, the implementation of the September rate hike is basically a “foregone conclusion.” However, judging from market performance and the drivers for the core CPI heating up in August, this data may not mean that the future rate hike path will be revised; it is more a relative advance of future interest rate hike expectations. The future rate hike path may depend on economic data performance.

Shen Wan Hongyuan's main views are as follows:

The US core CPI for August was stronger than expected, and interest rate hikes in September are expected to rise to 87%. Structurally, wireless telephone services and hotel accommodations are the main causes of the core inflation rebound, and sustainability is worrying. Looking ahead, will America's “de-inflation” be reversed, and will the Federal Reserve continue to raise interest rates?

The US CPI for August was in line with expectations, and the core CPI was stronger than expected.

The US CPI for August was 0.4% month-on-month and 3.4% year-on-year, in line with expectations. The core CPI was 0.3% month-on-month, better than market expectations of 0.2%; structurally, the overall CPI rebound was mainly affected by energy (oil prices) and was in line with expectations. In the core CPI, core commodities fell from 0.2% to 0.1% month-on-month in August, but core services heated up from 0.2% to 0.3%. It can be seen that the service segment was the main reason why core inflation exceeded expectations in August.

After the data was released, the probability of interest rate hikes in September rose to 87%, but the market did not change the forward rate hike path.

After the release of the CPI data that exceeded expectations, the market immediately reacted as interest rates on 2Y and 10Y US bonds rose, gold prices fell, and US stock futures fell. However, after that, interest rates on 10Y US bonds, gold prices, and US stocks were reversed. The 2Y US bond interest rate basically returned to the trend before the data was released, showing that the market traded the basic “nail in stone” of the September interest rate hike, rather than the overall rate hike path or cycle.

Core commodities cooled month-on-month in August, indicating that inflationary pressure on tariffs and AI weakened marginally.

Core commodity CPI fell to 0.1% month-on-month in August. Structurally, items such as furniture, clothing, entertainment products, and educational communication products all declined month-on-month compared to July. On the one hand, tariff-related inflation may continue to cool down in 2025; on the other hand, AI-related IT software and hardware inflation declined month-on-month in August. Looking ahead, tariffs may push core commodities to continue “de-inflation,” while AI inflation is a “medium-term risk.”

The rise in core services in August was mainly driven by wireless telephone services and hotel accommodations, which were not sustainable or strong.

The CPI for core services rose to 0.3% month-on-month in August, mainly driven by several factors: 1) wireless phone services rose from 0.6% to 5.9% month-on-month, reflecting a one-time impact; 2) hotel accommodations were 2.4% month-on-month, and the previous value was -2.8%, mainly reflecting temporary disruptions in summer travel demand; 3) transportation services rose to 0.5% month-on-month, with airline tickets and other segments reflecting a rebound in oil prices.

The August core CPI instructions are of limited significance, and we still need to pay attention to oil price risks in the short term. In summary, the momentum driving the US core CPI to heat up in August is not very sustainable, and a single data cannot yet draw a conclusion about “re-inflation” of the US core CPI. However, in the short term, oil prices are still the biggest risk, and the base effect during the year can also contribute to this. In the medium term, weakening of the inflation effect of tariffs, cooling rent inflation, and slowing wage inflation are the three major drivers of the cooling of core US inflation. AI inflation is a medium-term risk.

Risk warning: The oil price center moved higher than expected; Walsh's policy stance was “hawkish”; the US economic slowdown exceeded expectations.