Key Points The U.S. inflation data released last Friday exceeded expectations, quickly intensifying market expectations for interest rate hikes. In August, the U.S. CPI rose 0.4% month-on-month, higher than July’s 0.1%, and increased 3.4% year-on-year, unchanged from the previous value. Core CPI rose 0.3% month-on-month, while the year-on-year growth rate declined from 2.5% to 2.4%. The portion of core inflation exceeding expectations mainly came from volatile subcomponents such as wireless communication, lodging, and airline tickets, with wireless communication service prices rising 5.9% in a single month. In contrast, rent and owners’ equivalent rent both increased only 0.2%, and medical service prices fell by 0.2%, showing no broad and sustained inflationary pressure yet.
Although the market generally expects the Federal Reserve to raise rates by 25 basis points this week, we believe that if the Fed chooses to hike rates, it is more likely a response to rising energy prices and a fulfillment of previously hawkish policy communication, rather than the start of a new sustained rate hike cycle. Current inflationary pressure mainly stems from energy shocks and a few volatile components. The future policy path will still depend on whether energy prices further transmit to core inflation and inflation expectations.
The U.S. economy still shows a clear K-shaped divergence. The Fed’s Beige Book indicates that consumption demand among high-income groups remains robust, but ordinary consumers have become significantly more price-sensitive, with financial pressures continuing to increase for low- and middle-income households. U.S. corporate fixed investment is mainly driven by AI infrastructure construction, while non-AI investments such as office buildings and traditional manufacturing facilities remain generally weak, and household consumption grows moderately. This means that the resilience of the U.S. economy largely depends on AI capital expenditure and consumption by high-income groups, while the lower half of the K-shaped economy remains relatively weak.
Therefore, we believe there is still a possibility that the Fed’s future policy direction will shift toward rate cuts. As the impact of the energy shock gradually fades, core inflation continues to ease, and the lower half of the K-shaped economy further weakens, the Fed’s policy focus may gradually shift from preventing an inflation rebound to addressing economic downside risks. U.S. equity allocation should still center on AI and technology leaders capable of delivering revenue and free cash flow.
Risk Warning: If the Middle East conflict escalates further, causing energy prices to remain high for a prolonged period and continuously transmit to core inflation and inflation expectations, the Fed may adopt a more hawkish policy stance than expected and implement consecutive rate hikes.