The US CPI and core CPI were once again higher than expected in September, and the core CPI continued to hit a record high in the past 40 years. The steady rise in core services and food and beverage prices is the main reason for CPI's exceeding expectations.
Column of this issue: Core CPI year-on-year scenario estimation
. Currently, rent is the main core influencing factor in inflation. We assume four month-on-month scenarios and assume that the prices of other core services remain unchanged month-on-month, and the prices of core commodities fell slightly month-on-month. The results show that the core CPI is expected to peak in October year-on-year, but the decline has been limited since then. It is a high probability event that the core commodities and energy of
continue to decline year-on-year. However, the extreme high temperatures that swept the world this summer and the rapid cooling that followed may lead to large-scale global food production cuts, and the risk of rising food prices in the future cannot be underestimated.
US inflation shows strong stickiness, and the market's expectations of the Fed's interest rate hike to 5% have strengthened. Regarding the FOMC dot chart released in September, market expectations are already relatively sufficient. The yields of US dollar index and US bond remain strong in the short term, but the motivation to further attack is insufficient. On the contrary, the market may expect that the core CPI of the trading period before the next interest rate meeting will peak year-on-year.
Event: inflation recurred, and it exceeded expectations again
US September CPI year-on-year (non-seasonal adjustment) 8.2%, higher than the expected 8.1%, lower than the previous value of 8.3%; core CPI year-on-year, higher than the expected 6.5% and 6.3% and set a new high in the past 40 years.
In terms of product and service classification: core services and food and beverage prices have risen steadily (month-on-month expansion) is the main reason why CPI exceeds expectations . The absolute price of core commodities remained high, but fell slightly year-on-year under the base effect of . The absolute level of energy prices has both declined significantly and year-on-year.
core products sub-items slowed down or remained unchanged year-on-year compared with last month, among which the most contributors had a large decline. This is consistent with the shrinking consumption of durable goods in the United States and the easing of supply chain tensions. The year-on-year increase in core services of is still mainly driven by rent, medical care, and transportation. Although the US real estate market has shown signs of cooling down recently, rent prices continue to accelerate year-on-year. This is consistent with the risks we previously suggested. Rents lag behind housing prices, and rents are unlikely to fall significantly year-on-year. In addition, medical and transportation have also accelerated year-on-year. energy growth rate significantly declined year-on-year, Due to the high degree of self-sufficiency of oil and gas energy in the United States, the European energy crisis has not had a significant impact on domestic energy prices in the United States. food prices slowed slightly last month compared with , but we need to be wary of the reduction in grain production caused by extreme weather this year that may continue to push up food prices in the future.
1. Column: Core CPI year-on-year scenario calculating
full-scope inflation peaked year-on-year, and the market's attention is focused on when core inflation peaks. In core inflation, core commodities have also clearly reached their peak, and the focus is on core services. The housing sub-item (rent) accounted for the highest proportion of core services year-on-year. We estimate core inflation year-on-year based on several simple combinations of price scenarios.
First of all, rent lags behind housing prices, and it is likely to continue to expand month-on-month this year. According to statistical rules, the month-on-month growth rate of rent is 0%~0.5%, while the month-on-month growth rate in recent months is as high as 0.7%. We assume that the month-on-month growth rate slowed down slightly during the year, with four scenarios: 0.5%, 0.3%, 0%, and -0.3%.
Secondly, assuming that the month-on-month growth rate of other core services during the year is 0%. Core service consumption has strong demand rigidity and very resilient prices. As the actual purchasing power of American residents is eroded, the prices of core services other than rents continue to rise. Therefore, a month-on-month growth rate of 0% is already a very conservative assumption.
Finally, it is assumed that the price of core commodities has dropped slightly month-on-month. In fact, despite the sharp shrinkage of demand for durable goods, due to the damage to the supply chain and rising labor costs, the prices of core commodities have completely separated from the center of the past 30 years and have not fallen significantly in the near future. The assumption of a month-on-month growth rate of -0.5% is also more reasonable.
Based on the above scenario assumptions, under the conservative setting of the growth rate of core services other than rent is 0 and core commodities are -0.5% month-on-month, if rent continues to expand month-on-month in October, the core CPI may hit a new high in October, but will fall back year-on-year thereafter. If rents in October stagnate or fall back month-on-month, the core CPI in September is already a high year-on-year. From this point of view, the core CPI is also close to its peak. However, even if rents fall, the core CPI at the end of the year is still as high as more than 5% year-on-year; if rents continue to rise, it will remain above 6%.
2. CPI Sub-item analysis 2.1 Core commodity
As high inflation spreads around the world, commodity consumption continues to cool down. At the same time, overseas basically ends the regulatory measures related to the new crown epidemic. Supply chain pressure and PMI delivery time have basically returned to the pre-epidemic level. The US ISM PMI shows that upstream companies will also shorten the early purchase time to the pre-epidemic level and will no longer stock up in advance. The CPI of core products will continue to decline year-on-year.
2.2 Food
Extreme high temperatures that swept the world this summer and the rapid cooling that followed may lead to large-scale global grain production cuts, and the risk of rising food prices in the future cannot be underestimated. At present, the prices of major grain futures remained stable year-on-year, and there was no significant decline. The US food CPI will remain stable year-on-year, and there is even a possibility of further acceleration.
2.3 Energy
After the shale oil revolution, the self-sufficiency rate of US crude oil has increased significantly, and natural gas production has exceeded domestic demand. Therefore, the United States has not been affected by the European energy crisis, but has the ability to significantly increase the export of natural gas . In addition, before the US midterm elections, the US government continued to sell its strategic reserves to suppress oil prices, and US energy prices are likely to continue to decline year-on-year.
3. Future market outlook
The prediction value of the VAR model we built shows that the year-on-year growth rate of the US CPI at the end of this year was 6.6%~7.7%, with a center of 7.1%. OECD predicts that the core CPI of the United States will be above 4.5% at the end of this year.
As the past two CPIs show stickiness, the market's expectations for the Fed's interest rate hike to 5%. Regarding the FOMC dot chart released in September, market expectations are already relatively sufficient. The US dollar index and US Treasury yields remain strong in the short term, but the momentum for further attack is insufficient. On the contrary, the market may expect that the core CPI of the trading period before the next interest rate meeting will peak year-on-year.
