U.S. inflation rebounded for the second month in a row

While everyone thinks the Fed has entered the "last mile" of the battle against inflation, inflation seems to be making a comeback. As the Fed interest rate meeting is about to enter the final week countdown, on September 13, data released by the United States showed that the year-on-year growth rate of the US CPI rebounded for the second consecutive month and recorded the largest month-on-month increase in 14 months. This will directly affect the Fed's judgment and blueprint design on the future direction of interest rate policy, which is now increasingly divided. Moreover, rising interest rates combined with declining levels of savings could weaken consumer spending, one of the most important drivers of the U.S. economy.

Prices push up

Inflation fears in the United States have reignited. On September 13, data released by the US Department of Labor showed that the US CPI rose by 3.7% year-on-year in August, compared with an estimate of 3.6% and a previous value of 3.2%; The US CPI rose 0.6% m/m in August versus 0.6% expected and 0.2% previously. The last time the US CPI rose by more than 0.6% month-on-month, it occurred in June last year, and the year-on-year increase in that month was 9.1%, which is the peak of this round of US inflation.

The culprit that drove the US CPI higher in August is actually not difficult to find. Because all Americans may have felt it firsthand in the past month — and that is oil prices. On Tuesday, oil prices hit another year-to-date high, with U.S. WTI closing just below $89 a barrel. Brent crude futures rose above $92 a barrel, the highest level since November 2022.

The rise in crude oil is also directly reflected in the price of refined oil. The average price of regular gasoline nationwide on Sunday was about $3.82 a gallon, about 60 cents higher than at the beginning of the year, according to energy data and analytics provider OPIS. In addition, the average selling price of regular gasoline at U.S. gas stations hit its highest seasonal level in more than a decade earlier this month, according to the American Automobile Association (AAA), and diesel prices have doubled to the price of crude oil.

Therefore, "rising oil prices" has become a keyword in the reports of many institutions, on the one hand, oil prices directly affect the prices of gasoline, electricity, and natural gas in the CPI basket, on the other hand, oil prices will also push up the prices of other goods and services, such as food, transportation and transportation services.

AMB had expected a sizable jump in the headline US inflation rate in August, even to the upside risk relative to the consensus forecast. Higher gasoline prices will be the main upside, while the rebound in airfare and medical costs, as well as higher insurance prices, will also have an impact.

The National Bank of Canada also noted that the energy sector could have had a considerable impact on the overall index given the sharp rise in gasoline prices in August. Combined with housing cost factors, the two contributed to the US headline CPI rising 0.6% month-on-month in August.

Rate hike divergence

Since March 2022, the Fed has raised interest rates by 525 basis points in this tightening cycle, which is the most aggressive interest rate path in nearly 40 years, thereby suppressing demand to control inflation.

As the effects of monetary policy gradually become apparent, US inflation has fallen by more than half from its high in the middle of last year. Ahead of this month's policy meeting, the Fed remains firm and has not yet reached the time to declare victory, as prices are still far from the 2% target.

As the rate hike cycle draws to a close, there is inevitable disagreement within the Fed over what to do next. The Fed also mentioned in the minutes the risk of both sides of policy, on the one hand, the risk that too quickly easing policy will lead to higher inflation, and on the other hand, too much tightening will lead to economic contraction.

Fed officials have repeatedly stressed that they remain highly concerned about the upside risks to inflation and may need to keep rates high even if they stop raising rates in the future. Therefore, the August CPI data, while unlikely to change the market's expectation that the Fed's decision will remain unchanged next week, is likely to shape people's judgments about whether the Fed will raise interest rates in November or December.

The latest CME Group's Fed Watch tool shows a 93% chance that the Fed will leave interest rates unchanged next week. However, the outlook for interest rates in November is relatively uncertain – the industry expects a 59.2% chance that the Fed will remain on hold and a 40.8% chance of a rate hike.

Wang Youxin, a senior researcher at the Bank of China Research Institute, said that there is uncertainty about whether the Fed will continue to raise interest rates in September, and the probability of not raising interest rates is greater at present. In addition to inflation, the labor market, while remaining strong, is likely to cool, with a slight increase in the unemployment rate and a decrease in nonfarm payrolls. But the cumulative and lagging effects of rising interest rates will continue to dampen household consumption spending and property sales, as well as push up household debt spending and worsen household balance sheets.

Nick Timiraos, a Wall Street Journal reporter known as the "new Fed news agency," said in an article published on September 10 that the Fed's stance on interest rate hikes is undergoing an "important shift" and may pause in September and will take a closer look at the future rate hike path. "Some officials still prefer to raise rates excessively because they can be cut later," he said. But other officials now see inflation risks as more balanced, fearing that continued rate hikes could lead to an unnecessary recession or trigger a new round of financial turmoil."

Savings run out

The Fed's concerns are not unfounded. Yang Jinghao, chief economist of Kangkai Data Technology, if the anti-inflation process encounters resistance, the federal funds rate may remain high for a longer period of time, or even tighten further, thereby increasing the difficulty of a soft landing and the risk of stagflation or even recession.

In fact, the threat of recession has not disappeared, because consumer spending, the most important engine of U.S. economic growth, will not survive. According to a market survey published by the media, 56% of the 526 investors surveyed believe that early next year will be the first quarterly contraction in growth since the outbreak of the new crown epidemic, according to a market survey released by the media.

Among them, 57% of professional investors and 60% of retail investors believe that the decline in the supply of credit and the soaring cost of credit are the biggest obstacles facing consumers in the coming months. That's because the U.S. federal government provided trillions of dollars in financial support to consumers and businesses during the pandemic, stabilizing the economy amid business shutdowns and supply chain disruptions. Cash inflows have led to a significant increase in the amount of money U.S. households keep in banks than they did before the pandemic, which economists call "excess savings."

Right now, U.S. consumers are depleting the "excess savings" they accumulated during the pandemic, which could hurt the economy's ability to achieve a soft landing as the Federal Reserve continues to maintain high interest rates to fight inflation.

Analysts and central bankers have long cited excess savings as a reason the U.S. economy can avoid a deep recession, because excess saving often means excess consumption. But high inflation and rapidly rising interest rates are rapidly reducing this savings band.

A separate report by economists at the Federal Reserve specializing in international finance found that the United States had exhausted excess savings accumulated during the pandemic in the first quarter of 2023, slightly faster than other advanced economies. In addition, student loan payments that were suspended during the pandemic will resume in October, which could force U.S. borrowers to tap into excess savings, accelerating savings depletion.

Whether excess savings are depleted or likely to be depleted by the end of 2023 or early 2024, consumer spending could be reduced as those funds are exhausted, making it harder for the economy to achieve a soft landing and avoid a deep recession, Yang said.

Beijing Business Daily reporter Fang Binnan, Zhao Tianshu/Wen

Xinhua News Agency/Photo