Text: Zhang Yu, Deputy Director and Chief Macro Analyst of Huachuang Securities Research Institute (License No.: S0360518090001)
Contact: Fu Chunsheng (18482259975)
Matters
US July CPI 3.2% year-on-year, Bloomberg expected 3.3%; Core CPI 4.7% y/y, Bloomberg expected 4.8%; Quarterly CPI 0.2% month-on-month, Bloomberg expected 0.2%, quarterly core CPI 0.2% month-on-month, Bloomberg expected 0.2%.
Core ideas
The July CPI data reconfirmed the inflation signal that the Fed is ending its rate hikes, and this cycle of rate hikes is expected to be over. Empirically, in the second quarter of next year, the inflation constraint of interest rate cuts may be opened.
Report summary
Reconfirmation of inflation signals at the end of Fed rate hikes
We mentioned in "Three Signals to Stop Raising Interest Rates Have Appeared" that three conditions in favor of the Fed stopping interest rate hikes have appeared, and the July CPI data reconfirmed the inflation signal that the rate hike ended:
First, the month-on-month increase in core CPI continued to stabilize at the pre-pandemic average, and the annualized perspective has reached the inflation target of 2%. The core CPI recorded 0.16% month-on-month and an annualized rate of 1.9%, in line with June.
Second, prices of non-housing core services (super-service inflation) rebounded month-on-month, but remained within normal volatility. Growth in non-housing services rebounded 0.2% from 0.1%, not exceeding the pre-pandemic pivot level of 0.2%, compared to 0.5% last year and 0.3% in January-May this year.
Third, core commodity de-inflation continues, and the scope of price decline has further expanded. The core commodity CPI fell 0.3% month-on-month, an increase of 0.2 percentage points from the previous month; of the 27 major commodities, only 12 rose this month, 19 last year and the first quarter of this year, and 15 in the second quarter. In the future, the pressure on the supply chain has been greatly eased, and the destocking has not yet ended, which will continue to promote the process of de-inflation of core commodities.
Fourth, while headline inflation readings have picked up, the width of inflation has continued to fall. The general price upward pressure continues to weaken marginally, and the broad price increase diffusion continues to converge, which contributes to the stability of long-term inflation expectations and weakens the risk of subsequent upward inflation. In July, the proportion of CPI lines with a year-on-year increase of more than 2% fell from 62% to 59.2%, and the proportion of core CPI items with a year-on-year increase of more than 2% fell from 65.4% to 62.7%.
Again, we judge that this cycle of rate hikes may be over. For the Fed, stopping raising interest rates and then keeping them high, allowing inflation and employment to cool "naturally" may be a better option. Another rate hike may not accelerate the pace of core inflation falling, but may increase downside risks to the economy.
When is the inflation constraint of the Fed's rate cut likely to open?
When will inflation get close to the level where the Fed can cut interest rates? Empirically, it is probably the second quarter of next year. Since the Fed established the inflation target system in 1996, the CPI and core CPI at the time of interest rate cuts have averaged 2.5% and 2.3% year-on-year. Looking forward to the follow-up, it is expected that from Q3 this year to Q2 next year, the US CPI will be 3.5%, 3.3%, 2.8%, 2.7% year-on-year, and the core CPI will be 4.4%, 3.9%, 3.2%, 2.6% year-on-year, that is, if according to historical experience, in the second quarter of next year, the inflation constraint of interest rate cuts may be opened.
Summary of July data
CPI rose to 3.2% y/y from 3%. In the first half of the year, inflation readings fell rapidly, and the "contribution" of last year's high base accounted for half. However, the base pressure will be significantly reduced in the second half of the year (CPI averaged 1% m/m in the first half of last year compared to 0% in the second half of last year), and the year-on-year reading of CPI in June should be the lowest point of the year.
In terms of month-on-month categories, 1) the slowdown in rent growth has temporarily stopped, with rent growth in July remaining flat from 0.4% in June, and with the continuous adjustment of leases, rent growth may return to the pre-pandemic hub of 0.3% by the end of the third quarter. 2) De-inflation of core commodities continued, with the exception of medical supplies, alcohol and other miscellaneous supplies, all of which declined, with declines widened in furniture and household goods (-0.4%, -0.3% prior), used cars (-1.3%, -0.5% prior), recreational goods (-0.8%, -0.4% prior), education and communication supplies (-1.2%, -0.1% prior). 3) Prices of non-housing core services rebounded, with prices of household services (1.8%, 0.8% prior), recreational services (0.8%, 0.5% prior), transportation services (0.3%, 0.1% prior), and household utility services (0.5%, 0.4% prior) expanding, while prices of medical services (-0.4%, 0% prior) and other personal services (-0.1%, prior: 0.2%) turned from rising to falling.
Risk warning: The US economic and financial situation deteriorated more than expected, and inflation fell more than expected.
Report Directory
The body of the report
First, the inflation signal of the end of the Fed's interest rate hike is reconfirmed
We mentioned in "Three Signals to Stop Rate Hikes" that three conditions supporting the Fed's stop (a significant cooling of core inflation, a marginal return to the job market, and stagnant bank credit growth) have emerged, and the July CPI data reconfirmed the inflation signal that the rate hike is over:
First, the month-on-month increase in core CPI continued to stabilize at the pre-pandemic average, and the annualized perspective has reached the inflation target of 2%. The core CPI recorded 0.16% month-on-month in July, with an annualized rate of 1.9%, in line with June.
Second, prices of non-housing core services (super-service inflation) rebounded month-on-month, but remained within normal volatility. Growth in non-housing services rebounded 0.2% from 0.1%, not exceeding the pre-pandemic pivot level of 0.2%, compared to 0.5% last year and 0.3% in January-May this year.
Third, core commodity de-inflation continues, and the scope of price decline has further expanded. The core commodity CPI fell 0.3% month-on-month, an increase of 0.2 percentage points from the previous month; of the 27 major commodities, only 12 rose this month, 19 last year and the first quarter of this year, and 15 in the second quarter. In the future, the pressure on the supply chain has been greatly eased, and the destocking has not yet ended, which will continue to promote the process of de-inflation of core commodities.
Fourth, while headline inflation readings have picked up, the width of inflation has continued to fall. The general price upward pressure continues to weaken marginally, and the broad price increase diffusion continues to converge, which contributes to the stability of long-term inflation expectations and weakens the risk of subsequent upward inflation. In July, the proportion of CPI lines with a year-on-year increase of more than 2% fell from 62% to 59.2%, and the proportion of core CPI items with a year-on-year increase of more than 2% fell from 65.4% to 62.7%.
Again, we judge that this cycle of rate hikes may be over. For the Fed, stopping raising interest rates and then keeping them high, allowing inflation and employment to cool "naturally" may be a better option. Another rate hike may not accelerate the pace of core inflation falling, but may increase downside risks to the economy.
Moreover, when in the future will inflation approach a level where the Fed can cut interest rates? Empirically, it is probably the second quarter of next year. Since the Fed established the inflation target system in 1996, the CPI and core CPI at the time of interest rate cuts have averaged 2.5% and 2.3% year-on-year. Looking forward to the follow-up, it is expected that from Q3 this year to Q2 next year, the CPI will be 3.5%, 3.3%, 2.8% and 2.7% year-on-year; The core CPI was 4.4%, 3.9%, 3.2%, 2.6% year-on-year, that is, according to historical experience, the inflation constraint of interest rate cuts may be opened in the second quarter of next year.
After the release of the data, the expectation of interest rate adjustment at the market trading level did not change much. The probability of no rate hike (maintaining the 5.25-5.5% rate range) is expected to increase from 86% to 89% in September, from 69% to 70% in November (maintaining the 5.25-5.5% rate range), and the probability of not raising interest rates in December (remaining in the 5.25-5.5% interest rate range) from 64% to 65%.
Second, the interpretation of the US CPI data in July
Overall inflation in the United States rebounded slightly in July, with CPI rising from 3% year-on-year to 3.2%, slightly below overseas expectations of 3.3%; Affected by the widening year-on-year decline in automobile and medical service prices and the decline in rent growth, the core CPI fell from 4.8% to 4.7% year-on-year, lower than the expected 4.8%. In the first half of the year, inflation readings fell rapidly, and the "contribution" of last year's high base accounted for half. However, base pressure will be significantly reduced in the second half of the year (CPI averaged 1% m/m in the first half of last year compared to 0% in the second half of last year), and the year-on-year CPI reading in June should be the lowest point of the year.
Year-on-year, food prices, rent increases, automobiles, medical service prices declined, dragged down CPI by about 0.24 percentage points; gasoline prices fell narrowly, marginally pulling CPI by about 0.43 percentage points.
On a month-on-month basis, the core inflation price pressure did not rebound this month, and the core CPI rose by 0.2%, in line with June, in line with expectations, and continued to stabilize at pre-pandemic levels. In terms of categories:
First, the slowdown in rent growth has temporarily stopped, but the downward trend will not change. Rent growth in July was flat at 0.4% in June. From the second half of last year to the first quarter of this year, the rent growth rate was 0.7%, which fell back to 0.5% in April-May this year, and further fell to 0.4% in June-July. With the continuous adjustment of leases, the subsequent rent growth rate will continue to decline, and may return to the pre-pandemic center of 0.3% by the end of the third quarter.
Second, de-inflation of core commodities continues, and the scope of price declines has further expanded. The core commodity CPI fell 0.3% month-on-month, an increase of 0.2 percentage points from the previous month; of the 27 major commodities, only 12 rose this month, 19 last year and the first quarter of this year, and 15 in the second quarter. In terms of categories, except for medical supplies, alcohol and other miscellaneous supplies, the rest of the goods declined, with furniture and household goods (-0.4%, -0.3% prior), used cars (-1.3%, -0.5% prior), entertainment goods (-0.8%, -0.4% prior), education and communication supplies (-1.2%, -0.1% prior) expanding.
Third, prices of non-housing core services have rebounded, but remain within normal volatility. Growth in non-housing services rebounded 0.2% from 0.1%, not exceeding the pre-pandemic pivot level of 0.2%, compared to 0.5% last year and 0.3% in January-May this year. By category, prices of household services (1.8%, 0.8% prior), entertainment services (0.8%, 0.5% prior), transportation services (0.3%, 0.1% prior) and household utility services (0.5%, 0.4% prior) widened, while prices of medical services (-0.4%, 0% prior) and other personal services (-0.1%, 0.2% prior) turned from rising to falling.
For details, please refer to the report "[Huachuang Macro] Reconfirmation of Inflation Signals at the End of Interest Rate Hikes - US July CPI Data Review" released by Huachuang Securities Research Institute on August 12.
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