According to a research report released by CICC, the US CPI in September increased by 0.4% quarter on quarter (market expected 0.3%) and 3.7% year-on-year (market expected 3.6%). The core CPI is consistent with market expectations, with a quarter on quarter (0.3%) and 4.1% year-on-year. The reasons for inflation exceeding expectations come from three aspects: firstly, the rebound in the month on month growth rate of owner equivalent rent (OER) in housing; secondly, the transmission effect of oil price rise is still present; and thirdly, the stickiness of inflation in services outside of housing still exists. Inflation exceeding expectations brings an important inspiration, which is that slowing inflation is not something that should be expected, but rather a prerequisite for sustained monetary tightening. The Federal Reserve may no longer raise interest rates, but maintaining a high-pressure stance on inflation will be necessary. It is expected that Federal Reserve officials will be more cautious in their speeches in the coming weeks, as comments that may be interpreted by the market as doves are unnecessary and unnecessary. Investors will also be more cautious about the outlook for US inflation, and US bond yields may continue to stay high for longer.
The main viewpoints of CICC are as follows:
The US CPI in September increased by 0.4% quarter-on-quarter (QoQ) and 3.7% year-on-year, unchanged from the previous month.
The core CPI quarter on quarter was 0.3%, 4.1% year-on-year, slightly slowing by 0.2 percentage points compared to the previous month. Overall, the overall direction of inflation in the United States is still slowing down, but the slowdown process has not been smooth. After significant improvements in July and August, the decline in inflation in September was less than expected. The market reacted strongly to this, with US bond yields rising, the US dollar strengthening, and the three major US stock indices falling.
Why is inflation exceeding expectations?
Firstly, the owner's equivalent rent (OER) in housing increased by 0.6% month on month, up from the previous month.
The CPI housing index includes two main sub items: rent of primary residence and owners' equivalent rent (OER). The former corresponds to the rent of rental housing, with a weight of approximately 7.6% in the CPI, while the latter reflects the cost of self housing, with a weight of approximately 25.6%. In September, the rent of major residences increased by 0.5% month on month, which was unchanged from the previous month. The equivalent rent of homeowners increased by 0.6% month on month, rebounding from the 0.4% increase in the previous month. The rebound of the latter has driven the CPI housing index to rise above expectations.
Previously, there was a widespread expectation in the market that the rent of rental properties in the United States (such as Zillow's rent index) had significantly slowed down, and under the influence of lag, the CPI housing index would also significantly slow down. But at present, it seems that this is not the case. The CPI housing index is far from slowing down as reflected by market rents such as Zillow. There may be a statistical issue here: Owner Equivalent Rent (OER) is estimated based on housing rents that are similar in condition to the houses currently occupied by the owner, and is not conclusive survey data. Many of the houses occupied by the owner are far from the city, and most of them are single family units. For these large, expensive single family houses located in the suburbs, it is difficult to find directly comparable rental houses around them, Therefore, it can easily lead to statistical bias. Looking ahead, as housing accounts for nearly one-third of the CPI basket, this deviation may exacerbate the uncertainty of future US inflation trends.
Secondly, the transmission effect of rising oil prices is still ongoing.
In September, both fuel (+8.5%) and gasoline (+2.1%) significantly increased month on month, driving up energy commodity prices. Although natural gas services (-1.9%) have declined, the increase in electricity prices (+1.3%) still drove up energy service prices by 0.6% month on month. The rise in gasoline prices is the result of the global oil price surge since July. After entering October, due to increased geopolitical risks in the Middle East region, oil prices briefly fell and then surged again, increasing the uncertainty of gasoline price trends. The rise in oil prices not only affects energy prices, but also passes through to other prices, such as transportation and transportation service prices. Since the rebound in CPI ticket prices in August, intercity transportation prices in September have increased by 1.9% month on month. The US September PPI increase announced on Tuesday exceeded expectations, with nearly three-quarters of the contribution coming from the rise in energy commodity prices.
Thirdly, the resilience of inflation in services other than housing still exists.
Hotel prices rebounded significantly by 4.2% in September, ending two consecutive months of month on month decline. Hospital service prices (1.5%), express delivery prices (1.4%), and labor-intensive services such as garden and lawn services (5.0%) have also increased. In addition, there has been a significant increase in strikes and salary increases in the United States this year. In addition to Hollywood screenwriter strikes, truck drivers and airline pilots' salary increases, and automobile union workers' strikes, over 75000 healthcare workers announced strikes in October, making it one of the largest healthcare industry strikes in American history. These not isolated strike events indicate a strong willingness among workers to increase wages, which may lead to wage increases and hinder the slowdown in labor intensive service inflation.
Inflation exceeding expectations brings an important inspiration, which is that slowing inflation is not something that should be expected, but rather a prerequisite for sustained monetary tightening.
Previously, there was a popular view that inflation in the United States was temporary and the Federal Reserve did not need to maintain interest rates higher or longer. The bank believes that this idea overlooks the fact that the slowdown in inflation is the result of the Federal Reserve's continued interest rate hikes and firm resistance to inflation. If the Federal Reserve does not persist in raising interest rates, inflation may not necessarily fall back. From this perspective, although the Federal Reserve continued to underestimate inflation in 2021, it has promptly remedied it since 2022, not only by continuously raising interest rates significantly, but also by persisting in tightening even after some bank failures. This approach is worthy of recognition.
In the foreseeable future, US bond yields will continue to remain high for longer.
After the release of inflation data, US bond yields surged, reflecting that investors are more cautious about the US inflation outlook and no longer expecting more dove signals from the Federal Reserve. In the past two weeks, the yield of 10-year US Treasury bonds has sharply increased, and the financial conditions in the United States have significantly tightened. Some Federal Reserve officials have hinted that tightening financial conditions can to some extent replace raising interest rates. Agree with this view that if long-term interest rates can spontaneously rise, the necessity for the Federal Reserve to raise interest rates will decrease.
But even if the Federal Reserve held its ground in November, Powell's attitude would be difficult to soften, especially after the release of inflation data in September, and he did not want the market to interpret it as a lax anti inflation attitude. Therefore, it is expected that Fed officials will be more cautious in their speeches in the coming weeks, and any remarks that may be interpreted by the market as doves will be redundant and unnecessary.