Faced with explosive inflation, the Federal Reserve seems to have no reason to slow down the pace of interest rate hikes . Is there anything that can prevent the Federal Reserve from raising interest rates or even starting to cut interest rates?
According to the latest fund manager survey results, nearly half of the respondents said that if the inflation level drops below 4%, the Federal Reserve may "turn around."
Looking further, how will the inflation level decrease? When will it drop again? HSBC gave an analysis in the latest report. HSBC pessimistically predicted:
Core inflation will remain high at least for the rest of this year, and may begin to fall back next year. Before inflation declines, the labor market will weaken first.
Inflation is now expected to average 8.6% in 2022 (previously forecast 7.5%) and 5.0% in 2023 (previously forecast 3.6%)
All inflation components continue to rise
With increases in food, energy and core CPI Rising across the board, the overall CPI in the United States in May rose by 1.0% month-on-month and climbed to a high of 8.6% year-on-year. HSBC predicts that in the next few months, the US CPI will rise further, exceeding 9% in July and reaching a peak of 9.4% in September.
Among them, food prices have risen rapidly. For most of the decade before the epidemic, food inflation in the United States has been low. This year, strong demand and global supply shocks have brought huge pressure on price increases for all types of food. Prices are rising from grocery stores to restaurants, especially for food consumed at home. The impact of global agricultural and energy costs is gradually intensifying, with food inflation rising by more than 1% per month.
Higher energy costs are one of the factors driving up food prices, which also directly drives up the CPI. Data from in May shows that vehicle fuel prices have increased significantly (+4.1% month-on-month), electricity prices (+1.3%) and public natural gas service prices (+8%) have increased. Likewise, energy prices will push up CPI again in June. Recently, the average price of gasoline in the United States exceeded $5.0 per gallon, up from about $4.6 in late May.
The HSBC report pointed out that rising prices of key necessities such as food and energy may squeeze consumer budgets and cause households to reduce consumption of non-essential goods and services. On the other hand, rising food and energy prices are likely to affect consumers' inflation expectations and undermine consumer confidence. This has been reflected in the data. Consumer confidence in the United States hit a record low in June University of Michigan . Consumers' long-term inflation expectations broke through the narrow range of oscillations in the past few months, reaching the highest level since 2008.
In addition to rising food and energy prices, the latest CPI report also shows that core CPI is facing greater upward pressure. In seven of the past eight months, core CPI has increased by 0.5% or higher month-on-month. Data in May show that core commodity CPI (+0.7% month-on-month) and core service CPI (+0.6%). It is particularly noteworthy that the core CPI of the service industry has accelerated and may continue to rise in the coming months.
In fact, core inflation has become more widespread and entrenched. In May, prices of most goods and services increased month-on-month, including new cars (+1.0%), used cars (+1.8%), air tickets (+12.6%) and rentals (+0.6%).
Weak labor market may be a prerequisite for easing inflation
Overall, HSBC believes that labor market conditions are likely to weaken before inflationary pressures begin to ease, and consumer demand is likely to be even weaker for the remainder of the year. Within the year, the overall CPI averaged about 9% year-on-year, while the core CPI may remain above 6% year-on-year.
Specifically, the seasonally adjusted core CPI rose 6.5% year-on-year in the first quarter of this year. Year-on-year growth was 6.4% in the second quarter, 6.5% in the third quarter, and 5.6% in the fourth quarter. In the first half of next year, the growth rates in the first quarter of 2023 and the second quarter of 2023 are expected to drop to 3.9% and 3.7% respectively.
Demand is likely to slow significantly due to the lingering impact of monetary tightening, the fading boost from previous rounds of fiscal stimulus, and the squeeze on real incomes from high inflation.Home price growth is set to slow in the second half of the year after mortgage rates rose sharply since the start of the year, worsening housing affordability. In the long term, this may also alleviate pressure on rising rents. The labor market is likely to show some signs of softening into next year, including rising unemployment and slower wage growth, both of which will have clear implications for inflation.
In addition, HSBC pointed out that the trend of core PCE, the most favored inflation target of the Federal Reserve, is similar to that of core CPI. It is expected that the year-on-year growth rate of core PCE will remain at 5% for the remainder of 2022. In the second quarter of this year, core PCE will It rose 4.5% year-on-year, peaking at 4.9% in the third quarter and 4.6% in the fourth quarter; it fell back to 3.5% in the first quarter of 2023 and 3.3% in the second quarter of 2023. In other words, core inflation will remain more than twice the Fed's 2% target in 2022, and the Fed will continue to raise interest rates until inflation begins to cool.
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