The CPI in the United States is expected to rise to 2.8% year-on-year by the end of the year, with the core CPI at 3.2% year-on-year. The U.S. food inflation may face temporary pressure, while the upward risk of U.S. energy inflation is limited. The year-on-year growth rate of core goods inflation may fluctuate around zero, and core services may have some stickiness. It is expected that the probability of a 25 basis point rate cut in November is high, and there is still room for a 50bps rate cut within the year. In the short term, the upward risk of short-term U.S. Treasury yields is limited, and long-term U.S. Treasury yields may fluctuate widely.
The main points are as follows:
Affected by weather and policy changes in some countries, food prices have risen month-on-month recently, and the U.S. food CPI may face temporary month-on-month growth pressure in the future.
In September, the U.S. food CPI rose month-on-month to 0.4%, the highest value in eight consecutive months. Due to factors such as concerns about adverse weather conditions in some food-exporting countries, global grain prices have risen. At the same time, influenced by supply-related policies in some countries, the FAO meat and sugar price indices have also risen month-on-month recently. The rise in grain prices may drive the U.S. food CPI to face temporary month-on-month growth pressure subsequently.
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U.S. energy inflation continues to cool down. Since OPEC+ recently announced an increase in production, if there is no further escalation in the Middle East situation, the room for energy prices to rise is limited.
In recent months, the U.S. energy CPI has seen negative growth month-on-month, possibly due to the continuous high level of U.S. crude oil production and the expected decline in global crude oil demand. Since the conflict between Iran and Israel intensified at the beginning of October, global concerns about oil supply have intensified, and oil prices rose sharply at the beginning of October. However, after the monitoring committee meeting at the beginning of October, OPEC+ stated that it plans to increase production by 180,000 barrels per day starting in December. Recently, as the situation in the Middle East has gradually become clear, oil prices have fallen again. Considering the uncertainty of the global economic recovery and the pressure of OPEC+ production increases on crude oil prices, if geopolitical risks do not exceed expectations, the upward risk of energy prices in the future is relatively limited.
Core goods inflation may fluctuate around zero growth.
The year-on-year CPI of new cars has been negative for six consecutive months. It is expected that the current situation of sufficient supply and low demand in the new car market will put downward pressure on new car prices. It is expected that the year-on-year growth rate of new car CPI may fluctuate around zero within the year. At the same time, although the inventory of used cars is tight, consumers are looking for low-priced cars in a high-interest-rate environment, so the year-on-year growth rate of used cars and trucks CPI may also stabilize around zero. Overall, the probability of U.S. core goods inflation fluctuating around zero growth within the year is high, and even if there is upward pressure, it is expected to be relatively moderate.
For core services, the recent slowdown in U.S. wage growth, but considering the lag of wage growth pressure and the slowdown in the month-on-month growth rate of the housing item inflation, the risk of a significant upward year-on-year growth rate of core services in the short term is low.
Recently, wage growth has slowed down, with the average hourly wage growth rate remaining flat year-on-year, and the decline rate of wage growth for job-hoppers and stayers has also slowed down. The slowdown in the pace of wage growth may have a lagged impact on the growth rate of core services inflation, and considering the current slowdown in the month-on-month growth rate of housing item inflation, housing prices are still declining, and rent growth rate has only slightly rebounded after a significant decline in 2022-2023, it is expected that the risk of a significant upward year-on-year growth rate of core services in the short term is low.Overall, it is anticipated that by the end of the year, the CPI year-on-year may rise to around 2.8%, and the core CPI year-on-year may be around 3.2%.
Although the year-on-year growth rate of core commodity CPI is expected to fluctuate around zero, due to the periodic inflationary pressure on the food item in the United States, the energy item CPI is unlikely to contribute significantly to the downward trend of CPI year-on-year. The core service item may exhibit some stickiness, but the risk of a sharp increase in the year-on-year growth rate of core service items in the short term is relatively low. There is a risk of an increase in CPI year-on-year, and it may rise to around 2.8% by the end of the year. The downward space for core CPI year-on-year within the year may be limited, and it may be around 3.2% by the end of the year.
In the short term, the risk of an upward movement in U.S. Treasury yields is limited, and long-end U.S. Treasury yields may experience wide fluctuations. It is crucial to closely monitor the further release of important U.S. economic data.
With the U.S. employment data for September exceeding expectations and the inflation data for September falling slightly short of expectations, coupled with the continued hawkish remarks by Federal Reserve officials in October, market expectations for rate cuts have cooled, leading to a significant increase in long-end U.S. Treasury yields recently, with the 10-year U.S. Treasury yield once again surpassing 4%. The hurricane in the southeastern United States led to a sudden increase in the number of initial jobless claims in the first week of October. It is expected that weather will affect the non-farm employment data for October to be released next month. Considering that the short-term inflation risk in the United States is relatively controllable, the probability of a 25 basis point rate cut in November is high, and there is still room for a 50 basis point rate cut within the year. The market has already adjusted its expectations for rate cuts quite sufficiently. In the short term, long-end U.S. Treasury yields may fluctuate widely following the release of economic data, and the risk of further upward movement in short-end U.S. Treasury yields is limited. It is crucial to closely monitor the U.S. third-quarter GDP data to be released at the end of October. If the economy exceeds expectations in the third quarter, it may cause fluctuations in Treasury yields at that time.