US September CPI was 8.2% year-on-year, up from 8.3% in the previous year, higher than the market expectations of 8.1% and lower than our forecast of 8.4%. The core CPI was 6.6% year-on-year, with the previous value of 6.4%. According to the
sub-item, rent was 6.6% year-on-year, contributing 2.26 percentage points, services were 4.6% year-on-year, contributing 1.59 percentage points, commodities were 6.6% year-on-year, contributing 1.37 percentage points, food was 11.2% year-on-year, contributing 1.57 percentage points, energy was 19.8% year-on-year, contributing 1.45 percentage points.
The US CPI in September was 8.2% year-on-year, up 0.2% month-on-month, reversing the trend of weak negative growth in July and August for two consecutive months. comparison, we found that the main reason why the actual value is lower than our prediction is that the growth rate of commodity prices is lower than expected. The decline in commodity prices is more obvious in household furniture, automobiles and trucks. Our consistent view is that durable goods consumption elasticity is relatively high. Once demand rebounds slightly, prices will rebound again, so it is difficult to form the basis for the continued downward trend in inflation.
We believe that given the current high inflation, the restricted interest rate level should be higher than the moderate inflation era. The US benchmark interest rate needs to at least catch up with wage growth and core CPI, which may prompt a steady decline in inflation. According to the leading role of housing prices on rents, the year-on-year growth rate of CPI rent will continue to rise, and inflation may be more stubborn than expected.
We believe that the best practice for the Federal Reserve is to raise interest rates as soon as possible by 100bp to increase the federal funds rate to 4.75%-5.00%, and then maintain this interest rate level in 2023. Inflation will naturally fall after demand weakens. Wait until 2024, the Fed can return to easing to restore the economy. Otherwise, if the restricted interest rate is only increased to 2023, the Federal Reserve may not have monetary policy tool available after the US economic recession, and it will be extremely difficult for the economy to recover again.
US September CPI 8.2% year-on-year
US September CPI 8.2% year-on-year, the previous value was 8.3%, higher than the market expectations of 8.1%, and lower than our forecast of 8.4% last month. CPI increased by 0.2% month-on-month, reversing the trend of weak negative growth in July and August for two consecutive months. From the perspective of sub-items, rents were 6.59% year-on-year, contributing 2.26 percentage points year-on-year, and may continue to drive inflation upward. Although commodity prices fell back to 6.63% year-on-year, service prices rose to 4.62% year-on-year, indicating that overall demand is still strong, but consumption is changing between goods and services. International oil prices have rebounded recently, which may delay the decline of CPI energy items. The food remained at a high of around 11% year-on-year. We believe that the inflationary pressure in the United States still exists and there is no continuous downward trend. Inflation has fallen too slowly, and the Fed needs to continue to raise interest rates sharply. We expect a rate hike of 75bp in November, and there is even a certain probability of 100bp.
By comparison, we found that the main reason why the actual value is lower than our forecast is that the growth rate of commodity prices is lower than expected, but the improvement in supply may not be enough to suppress inflation. We predict that CPI products (excluding energy and food) will grow by 7.2% year-on-year in September, while the actual value is 6.6% and 7.1% in August. The growth rate of commodity prices has dropped significantly, such as household furniture, automobiles and trucks, and other durable products with higher elasticity. For example, in September, the new CPI car was 10.5% year-on-year, down 0.4 percentage points, the new CPI truck was 9.1% year-on-year, down 0.7 percentage points, and the used CPI car and trucks were 7.2% year-on-year, down 0.6 percentage points. Our consistent view is that durable goods consumption elasticity is relatively high. Once demand rebounds slightly, prices will rebound again, so it is difficult to form the basis for the continued decline in inflation.
Supply of supply chain pressure and enterprise price reduction and inventory clearance are also important reasons for the decline in commodity prices. The New York Fed's global supply chain pressure index fell sharply to 1.05 in September, indicating that the price pressure from commodity transportation supply has been alleviated. Since October 2021, due to supply pressure and inflation, retailers' willingness to hoard inventory has gradually increased, and the inventory growth rate has increased significantly. In March 2022, retailers' inventory was 12.32% year-on-year, the fastest growth rate in history, and then continued to rise to 20.66% in July. As supply pressure weakens and expectations of recession are expected, retailers have begun to cut prices and clear inventory.In the minutes of the September meeting, the Fed said, "Some retail industries (such as used cars and clothing) are planning to cut prices to help reduce inventory." But We believe that price improvements from the supply side are limited and difficult to sustain, and the long-term decline in inflation will still rely on demand contraction. As long as demand is strong, inflation will remain high.
Core inflation is still rising, with the US core CPI in September 6.6% year-on-year, compared with the previous value of 6.3%, higher than market expectations of 6.5%. The United States' core CPI in September broke through the high of 6.5% in this round of inflation year-on-year, setting a new high since September 40, 1982. Because food and energy prices fluctuate relatively largely, the core CPI better reflects the basis of inflation. In "Forget the data to fall, beware of demand counterattack - Review of the US July inflation data", we have pointed out that "the US labor costs are leading the core CPI for about 12 months year-on-year. According to this leading relationship, the core CPI is currently in a stable period year-on-year, but may rise again by 2023." The upward momentum of core inflation in has not ended. core CPI rebounded sharply in August and continued to rise in September, which may prompt the Fed to raise more aggressively.
The rate hike needs to continue to increase to 100bp
Interest rate level has not risen to a level that can cause core inflation to fall, and the restricted interest rate needs to at least reach above the wage growth rate. It can be seen from historical data that the growth rate of core CPI is relatively consistent with the yield of ten-year treasury bonds, but the current year-on-year core inflation is far higher than the yield of ten-year treasury bonds, and there is also a big gap between the growth rate of federal funds rate and the average hourly wage. This shows that interest rates are still low and the restrictions on the economy are not enough to make the labor market cooler. We believe that given the current high inflation, the restrictive interest rate level should be higher than the moderate inflation era. The US benchmark interest rate needs to at least catch up with wage growth and core CPI, which may prompt a steady decline in inflation. The average hourly wage growth rate in September of the United States is 4.98%, which is one of the important reasons why we always believe that the benchmark interest rate at the end of the year should be increased to 4.75%-5.00%.
Inflation may be more stubborn than expected. According to the leading role of housing prices on rent, the year-on-year growth rate of CPI rent will continue to rise. US CPI rent rose 6.59% year-on-year in September. We predict that it may reach 6.97% in October, exceed 7% in November, and exceed 8% in April next year, forming stable and strong upward pressure on inflation. In September, rent accounted for 32.62% of the US CPI weight, which is the largest component of CPI . What's even more difficult is that CPI rent is calculated based on US housing prices in the past year. The impact of the Federal Reserve's interest rate hike on CPI rent is very lagging. Therefore, U.S. inflation is deeply rooted, and the Federal Reserve must raise interest rates to a restrictive level as soon as possible and maintain this level for a period of time to suppress inflation.
The best way for the Federal Reserve is to quickly increase interest rates and keep it by raising interest rates by 100bp. According to the Federal Reserve's September meeting, the end-point interest rate level in 2023 has reached 4.6%, and there is still some room to go before the restricted interest rate, which may still need to be raised in the future. However, if this interest rate is only increased to 2023, it will need to be maintained for at least half a year before inflation can fall from a high level. In other words, after the US economy is recession, the Federal Reserve will have no monetary policy tools available, and it will be extremely difficult for the US economy to recover in 2024. So, we think the best practice is to raise the Federal Reserve 100bp rate hike to increase the federal funds rate to 4.75%-5.00%, and then maintain this interest rate level in 2023, and inflation will naturally fall after demand weakens. Wait until 2024, the Fed can return to easing to restore the economy.
We expect that US inflation may rebound in October and November, and CPI may rebound to around 8.3% year-on-year in October. In fact, according to our prediction model , the year-on-year growth rate of food, energy, goods and services will all decline slightly, but because CPI rents continue to accelerate year-on-year, it has driven a rebound in inflation. In the minutes of the Fed's meeting in September, "inflation has not yet responded to policy tightening, and a sharp decline in inflation may lag behind a decline in total demand."The point when total demand drops sharply may be after the US economy recession next year, so inflation may last at a high level for a long time, and the Fed's interest rate hike cannot be relaxed at all.
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Securities research report:
"Core inflation is still rising, we need to consider raising interest rates by 100bp - Review of US September inflation data"
This article comes from the securities research report selected
