CICC: The stickiness of US inflation supports the continued increase of interest rates by the Federal Reserve

The Zhitong Finance App learned that CICC released a research report saying that the US CPI quarterly rose 0.4% month-on-month (0.6% last month) and core CPI rose 0.3% month-on-month (0.3% last month), all higher than market expectations. The US government shut down in October last year and did not release economic data, so year-on-year data is missing. Overall, inflation is still very sticky. The core CPI rose 0.3% for the third month in a row, supporting the Federal Reserve to continue to raise interest rates. Recently, Federal Reserve Governor Waller proposed that a 50 basis point increase in interest rates in December is not ruled out. However, the bank believes that the Federal Reserve's policy is not clearly “behind the curve,” and that financial conditions have been marginally tightened, so there is little need to speed up interest rate hikes. The bank maintained its benchmark judgment of 25 basis points of interest rate hike in December, and the pace of this round of austerity is still gradual and moderate.

CICC's main views are as follows:

Energy inflation is weakening marginally, and food prices are rising at an accelerated pace. Energy CPI rose 0.7% month-on-month in October, down sharply from the 5.2% increase in September. Among them, gasoline prices rose 1% month-on-month, fuel prices rose 2% month-on-month, all significantly lower than the September increase, and gas pipeline services fell 0.8% month-on-month. However, electricity prices rose 0.9%, the highest since May this year. In the context of data center construction and growing demand for electricity, electricity prices may have some upward pressure.

Food CPI rose 0.5% month-on-month in October, the highest since May this year. Among them, household food rose 0.4%, while dining out rose 0.5%. The rise in food prices has a wide coverage. Prices of fruits and vegetables, dairy products, and meat have all risen, not driven by a single category. This may have been affected by the downward transmission of the previous rise in energy prices.

Core commodity prices are generally moderate. Excluding energy and food, core commodity prices rose 0.2% month-on-month in October, down from 0.3% in September. Among them, new cars (0.2%), furniture (0.7%), and medical products (0.5%) are still rising, while used car prices have dropped 1.2%, the lowest level since February this year. Prices of computer software and accessories fell 1.5% month-on-month, and the month-on-month growth rate of computers, peripherals, and smart home assistants fell to 0.5% from 1.4% last month, indicating a slight easing of AI inflationary pressure. However, the price of AI-related hardware is still rising, and the subsequent price increase pressure remains to be seen.

Rent inflation is generally stable. Housing CPI rose 0.3% month-on-month in October, down from 0.4% in September. Among them, landlord equivalent rent (OER) rose 0.3%, and actual rent rose 0.2%, all the same as last month. Judging from the forward-looking rent indicators, there is no sign that rent inflation is accelerating upward.

Non-rent core service inflation (supercore) is sticky, and the increase in transportation service prices has increased. The price of non-rent core services increased by about 0.4% month-on-month in October, which is basically the same as last month. Among them, transportation service prices rose 0.8% month-on-month, up from 0.6% last month, but the price increase structure changed. Auto insurance prices rose 0.7% month-on-month, public transportation prices rose 2.0%, while ticket price increases slowed to 0.4% from 1.2% last month. Furthermore, the price of medical services rose 0.3%, and the price of entertainment services rose 0.9%, indicating that the sources of service inflation are still relatively widespread, and overall stickiness. Looking ahead, with the recent fall in international oil prices, the pressure transmitted by energy costs to transportation and other service prices is expected to ease. However, wage growth in the manufacturing and construction industries has accelerated. We need to pay attention to whether the recovery in labor demand will further boost wages in labor-intensive service industries, creating mutually reinforcing pressure on wages and service prices.

The bank believes that inflationary pressure is too high and supports the Federal Reserve to continue to raise interest rates, but there is little need to speed up interest rate hikes. The core CPI rose 0.3% month-on-month in October, indicating that inflation is still sticky, supporting the Federal Reserve to further tighten monetary policy. The bank also maintained its previous judgment: the Federal Reserve will raise interest rates again in December.

Before the CPI data was released, Federal Reserve Governor Waller said that if the core CPI reached 0.3% or higher in October, a one-time interest rate hike of 50 basis points should be considered to maintain the credibility of monetary policy. The data is in line with its proposed conditions, and the market is worried about this. The bank believes that a larger rate hike usually means that policy adjustments need to be accelerated to make up for the lack of previous austerity, but the recent marginal tightening of financial conditions indicates that early austerity is already taking effect; at the same time, the month-on-month growth rate of inflation in the past two months is more indicative of stickiness. There is no sign of an acceleration of the increase, and there is no need for the Federal Reserve to accelerate austerity. In fact, Waller himself also supported suspending interest rate hikes at the October meeting. If he believes that monetary policy is “behind the curve,” he should have opposed staying on hold at the time.

One possibility is not ruled out: the recent midterm election results have been implemented, the Democratic Party won a big victory, the pressure on the Federal Reserve has been reduced, and some officials may be inclined to act as soon as possible to ease the high level of inflation. However, whether it is necessary to raise interest rates by 50 basis points in one go is yet to be assessed. Even within the Federal Reserve, aggressive interest rate hike strategies may not necessarily be supported by most officials. Previously, the most hawkish Dallas Federal Reserve Chairman Logan only thought that interest rates should be raised twice more, 25 basis points each time. In summary, until more economic data is released, the bank's benchmark situation is still the 25 basis point rate hike in December, and this round of austerity is still a gradual, relatively moderate cycle of austerity.