Wang Jinbin, Executive Deputy Secretary of the Party Committee of the School of Economics at Renmin University of China, Researcher at the National Institute of Development and Strategy, and Key Member of the China Macroeconomic Forum (CMF)
Number of words in this article: 2002 words
Reading time: 5 minutes
The core inflation rate (PCE) in the US economy is not sensitive enough to interest rates, and US inflation may exceed the Federal Reserve's expectations. Eleven interest rate hikes of 525 basis points have resulted in a decrease of less than one-third in core PCE to date. There are two main reasons: firstly, the tight labor market has led to an increase in wages, supporting consumption; The second is that the rise in asset prices has brought about a wealth effect, stimulating consumption by American residents. The high number of vacant positions and the still strong risk appetite in the financial market have resulted in unsatisfactory effects of the Federal Reserve's monetary policy on labor income and asset prices. The decline in core inflation in the United States is slow, and the duration of the Federal Reserve's "restrictive interest rate level" will also exceed expectations.
On October 17, 2023, the Atlanta branch of the Federal Reserve increased the real GDP growth rate of the United States in the third quarter to an annual rate of 5.4%. According to data released by the US Department of Commerce, US retail sales increased by 0.7% month on month in September, with core retail sales excluding automobiles, gasoline, building materials, and food services increasing by 0.6%. In September, the US CPI increased by 3.7% year-on-year, which is the same as in August, with a month on month increase of 0.4%, slightly slowing down from the 0.6% increase in August. Excluding volatile food and energy prices, the core CPI for the month increased by 4.1% year-on-year and 0.3% month on month. At present, BEA has not yet released September PCE data. In August, PCE was 3.5% year-on-year, while core PCE was 3.9% year-on-year. Based on the unexpected month on month increase in retail sales in September, the year-on-year increase in core PCE in September may once again return to the 4% range.
From the PCE in August, compared to the high point of July 2022, which was 7.1% year-on-year, it decreased by 51%; The core PCE was 3.9% year-on-year, a decrease of 30% compared to the high point of 5.6% year-on-year in February 2022, less than one-third. The decline in core PCE is much slower.
According to the data from the Federal Reserve's three economic forecast summaries for March, June, and September this year, the predicted range of PCE for the entire year of 2023 is 3.0-3.8%, 3.0-3.5%, and 3.2-3.4%, respectively; The lowest year-on-year PCE value from January to August was 3.2% in June. On the one hand, as the base decreased, and on the other hand, as the month on month growth did not slow down, the year-on-year increase in PCE in August once again increased to 3.5%. The year-on-year increase in PCE from January to May was between 4.0-5.5%. Therefore, it is quite difficult for the US PCE to fall into the range of 3.2 to 3.4% in 2023.
From the perspective of core PCE, the three predicted value ranges for March, June, and September 2023 are 3.5-3.9%, 3.7-4.2%, and 3.6-3.9%, respectively. According to the currently announced core PCE for January August, the lowest value is 3.9% year-on-year in August, while the remaining seven months are between 4.3% and 4.9%. From the perspective of the next few months, on the one hand, the base is declining, and on the other hand, the PCE is still positive month on month. It is not difficult for the core PCE to fall into the range of 3.6-3.9% for the whole year.
According to the Federal Reserve's three predictions of US GDP this year, there is a huge gap. The forecast for March was 0.4%, the forecast for June was 1.0%, and the forecast for September jumped to 2.1%. If the annual GDP rate in the third quarter exceeds 5%, considering that the annual GDP rates in the first and second quarters of this year are 2.2% and 2.1% respectively, the US GDP growth rate in 2023 may exceed the Federal Reserve's mid September forecast of 2.1%.
It can be seen that the US inflation rate (PCE) in 2023 may exceed the Federal Reserve's expectations.
According to the US Financial Accounts data released by the Federal Reserve in mid September, the net wealth of US households in the second quarter of 2023 reached nearly 154.3 trillion US dollars, an increase of nearly 8.5 trillion US dollars compared to the fourth quarter of 2022. Among them, the value of stocks increased by 2.6 trillion US dollars and the value of real estate increased by 2.5 trillion US dollars. According to WIND data, as of October 18th, the Dow Jones, S&P 500, and Nasdaq have risen by approximately 2.6%, 13.9%, and 29.3% respectively this year. According to data from the St. Louis branch, S& The P/Case Shiller US housing price index rose from 292.9 in January 2023 to 310.2 in July. According to the Federal Reserve's survey data in 2019, among low-income residents with a household proportion of 50%, financial assets and real estate account for approximately 8.5% and 22.3%, respectively. Among middle-income residents with a household proportion of 40%, financial assets and real estate account for approximately 12.0% and 22.7%, respectively. Therefore, the wealth effect brought about by financial assets and rising housing prices has stimulated consumption.
From the perspective of the labor market, the unemployment rate in September was 3.8%, with a more than expected increase of 336000 non agricultural employment positions and a decrease in wage growth. The average hourly wage increased by 0.2% month on month and 4.2% year-on-year. The year-on-year increase in salary exceeded the 3.7% increase in CPI, supporting the actual purchasing power of American residents. From a savings perspective, in August 2023 (annual rate), personal savings approached $0.8 trillion, an increase of approximately $0.3 trillion compared to mid-2022. Savings can still support a certain level of consumption.
Overall, the core PCE in the US economy is not sensitive enough to interest rates. There are two main reasons: firstly, the tight labor market has led to an increase in wages, supporting consumption; Secondly, the rise in asset prices has brought about a wealth effect, stimulating consumption among American residents. The high number of vacant jobs in the US economy (9.6 million in August) and the strong risk appetite in the financial market (the recent yield premium of Aaa rated bonds and treasury bond in the same period has been at the low point since the global financial crisis) have made monetary policy ineffective in the two channels of labor income and asset prices, leading to the slow decline of core inflation in the US, and the duration of the Federal Reserve's "restrictive interest rate level" may also exceed expectations.
Chen Yanbin: There is a significant gap between economic growth rate and optimal level, and macroeconomic policies can be strengthened
Xu Gao: Macro policy coordination and coordination to promote high-quality development - Taking the automotive and real estate industries as an example
Cheng Shi: Macroeconomic Policy Matching to Address Economic Challenges
Nie Huihua: Give Market Space and Encourage Fertility, Let the Economy Grow Naturally
Focusing on "Strengthening Macro Policy Coordination and Improving Policy Effectiveness", CMF Special Report Released