Event: The US August CPI rose 0.4% month-on-month, in line with expectations, previous value 0.1%; year-on-year 3.4%, in line with expectations, previous value 3.4%; core CPI rose 0.3% month-on-month, expected 0.2%, previous 0.2%; year-on-year 2.4%, previous 2.5%.
Key Points: 1. Some subcomponents indicate certain pressure on labor costs, consistent with nonfarm payroll wage data. 2. The policy interest rate is at a borderline easing level; the probability of a rate hike in September is high, and a further hike in December cannot be ruled out. 3. Fiscal and monetary policies are likely to resonate after Q4, maintaining the view that even without a US-Iran conflict, medium-term inflationary pressure remains.
The subcomponents contributing most to the month-on-month CPI increase were energy, shelter, education and communication services, transportation services, transportation products, and food; those suppressing inflation were medical services, medical supplies, and household furnishings (Chart 23). Within core inflation, month-on-month increases were seen in communication (2.3%), lodging away from home (2.4%), airline tickets (2.7%), education (0.8%), used cars (0.4%), and new cars (0.3%), while the most notable declines were in medical care (-0.2%) and auto insurance (-0.8%).
Some subcomponents show labor cost pressures. The food subcategory of full-service meals away from home has maintained a high month-on-month growth rate for several months, differing somewhat from other food subcategories (Charts 3, 4). Excluding shelter, core services inflation rose 0.3% month-on-month (previous 0.3%), breaking the pattern this year of monthly growth rates being lower than the same period last year (Chart 22). Property services prices maintained a steady month-on-month increase, with August year-on-year at 4.8% and month-on-month at 0.5%. In medical services, non-specialized hospital and related services (mainly nursing, etc.) rose 5.5% year-on-year and 0.1% month-on-month. Transportation services rose 0.5% month-on-month, mainly from vehicle rentals and motorcycle repair costs; influenced by rising oil prices, airline tickets and local transportation prices increased significantly, year-on-year 23.4% and 8.5%, month-on-month 2.3% and 0.8%; meanwhile, auto insurance continued to decline (year-on-year -5.1%, month-on-month -0.8%), partially offsetting inflation. Entertainment services were flat month-on-month but rose 2.4% year-on-year, mainly due to stable membership fees; audiovisual services and pet-related expenses increased notably, year-on-year 4.5% and 4.8%, month-on-month 1% and 0.7%.
In our August nonfarm payroll commentary, we noted that although wage growth slowed and lagged inflation, the 12-month moving average year-on-year growth rate of the 25th percentile wage stabilized and rebounded, while weekly wages still outpaced inflation year-on-year. This aligns with observed labor cost pressures in inflation data.
Core goods prices remained stable month-on-month (0.1%). Car prices rebounded somewhat; AI-related electronics (computers and peripherals, software, year-on-year 8.4% and 25.4%, month-on-month 3.8% and -2.2%) rose, but price declines in phones (year-on-year -14.1%, month-on-month -2.4%) offset some of this pressure. Some subcategories remain affected by tariffs but represent a small share.
Based on economic growth recovery, prolonged high oil prices may exert real inflationary pressure. Inflation results from the resonance of various macro factors; its trend impact depends on economic fundamentals and the pace of monetary and fiscal policies. From 2011 to 2014, crude oil prices hovered around $100/barrel, but due to the global economy being affected by the subprime and Eurozone debt crises, real demand was weak. Even under QE, US CPI and core CPI did not trend upward (Chart 11). Considering that in this economic cycle, the long-term economic growth level has significantly increased (10-year average real GDP growth above 2.4%), and oil prices have not fallen timely or effectively, the current high oil prices may have different effects than in 2011-14.
Policy interest rates are at a borderline easing level. According to our simple calculations, the current policy rate is at the boundary between normal and easing. If Q3 GDP growth continues to rise and no rate hike occurs, the policy rate will fully enter the easing range (Chart 26). According to the latest statements from Trump, oil prices may remain high until the November midterm elections. At that time, high oil prices combined with loose interest rates may exert real upward pressure on core inflation.
If oil prices remain elevated, consecutive rate hikes within the year cannot be ruled out. Compared to pre-tariff last year, on the policy side, monetary policy rates are lower than before tariffs; the fiscal tax cut package has been fully implemented. On fundamentals, the three rate cuts in the second half of last year have gradually impacted the labor market, which has slightly improved; AI’s contribution to GDP exceeds that of consumption; consumption remains relatively stable. Timing-wise, the second half is the traditional consumption peak season, and loose fiscal and monetary policies are likely to resonate with consumption in Q4, making US inflation after August more likely to exceed expectations. In our previous commentary, we stated that whether to hike rates in September depends on inflation data; compared to September, the probability of a December hike has increased. Given this inflation data, we believe the probability of a September hike has increased, and a December hike cannot be ruled out.
We raise the US 10-year Treasury yield target to 4.7–5%. According to our model, this upper limit implies assumptions of 2–3 rate hikes within one year without a recession (Chart 25).
Risk Warning: US inflation exceeds expectations.