CICC has released a research report stating that the Federal Reserve is still likely to keep rates unchanged in October, with the next rate hike possibly coming in December.
However, a slower pace of rate hikes does not mean monetary policy is shifting toward easing. Considering the robust US economic growth, resilient labor market, and still-elevated inflation, the Fed is likely to maintain a relatively tight monetary policy stance for an extended period. Over the next year, the probability of the Fed pivoting to rate cuts is low, and a high interest rate environment will remain the new normal that the US economy and financial markets need to adapt to.
US September CPI rose 0.6% month-over-month on a seasonally adjusted basis and 3.7% year-over-year; core CPI rose 0.3% month-over-month and 2.6% year-over-year, both rebounding from the previous month and exceeding market expectations. The sources of price increases were broad, with energy, core goods, and rent all contributing. Elevated oil prices intensified energy inflation, consumption resilience and AI investment demand supported goods prices, and rent stickiness constrained the decline in services inflation.
On the monetary policy front, the inflation rebound reinforced the need for the Fed to continue raising rates, but given the recent rise in US Treasury yields and the stronger dollar, financial conditions have already tightened partially, and the Fed may exercise patience. CICC expects another pause in October and action again in December. However, a slower pace of rate hikes does not mean monetary policy is shifting toward easing, and over the next year, the Fed is likely to maintain a relatively tight policy stance.
The sources of this inflation rebound were broad, with energy, core goods, and rent all contributing. On the energy front, as international oil prices remained persistently high, the energy component rose 5.2% month-over-month on a seasonally adjusted basis in September, with gasoline up 9.1%, contributing more than half of the overall CPI increase. Fuel oil prices surged 15.3% month-over-month. Looking ahead, the geopolitical situation in the Middle East has yet to ease, and CICC believes energy inflation pressures will be difficult to alleviate in the short term and may continue to be reflected in October CPI data.
Core goods inflation regained momentum, reflecting that household consumption demand remains resilient, and AI-related inflation pressures persist. Excluding energy and food, core goods prices rose 0.3% month-over-month in September, mainly driven by gains in toys (+4.2%), apparel (+0.3%), and used car prices (+0.7%). Toys and apparel may have been boosted by the back-to-school season and autumn clothing launches, while used car price increases reflect that households maintained some purchasing power amid high oil prices. Meanwhile, price pressures from the data center construction boom continued: computer software and accessories prices rose 0.4% month-over-month, with the year-over-year increase still as high as 28.4%; computer, peripheral equipment, and smart home assistant prices rose 1.4% month-over-month, with a year-over-year increase reaching 9.7%, both continuing to hit record highs on a year-over-year basis.
Rent inflation stickiness strengthened, hindering the cooling of services inflation. The housing component rose 0.4% month-over-month in September, with owners' equivalent rent up 0.3% month-over-month and primary residence rent up 0.2%. Since rent carries a high weight in the CPI basket, it poses an obstacle to core inflation converging toward the 2% target. However, considering the recent sustained rise in mortgage rates and the weak real estate market, CICC believes the persistence of rent increases may be limited. Forward-looking indicators for rent also show no signs of sustained price increases yet.
Non-housing core services inflation was relatively moderate, with wireless telephone services flat. Non-housing core services (supercore) prices rose 0.4% month-over-month in September, down from 0.5% the previous month. Among these, wireless telephone service prices were flat month-over-month (after surging 5.9% the previous month), no longer contributing to the monthly increase, indicating that this price increase was more likely a one-off. Transportation services prices rose 0.6% month-over-month, higher than 0.5% the previous month, with airfares up 1.2%, showing that rising oil prices continued to pressure transportation costs.
After the CPI release, the dollar strengthened, while US stocks and gold both fell significantly. The strong market reaction was because the inflation overshoot broke the market's previous judgment on the pace of rate hikes, and investors began to reassess the possibility of a Fed rate hike in October. CICC believes that although the Fed needs to continue raising rates, the next hike may not necessarily occur in October. First, since the September FOMC meeting, the Fed has only received one set of nonfarm payroll and one set of CPI inflation data. Although today's inflation data supports further policy tightening, whether rate hikes are needed at two consecutive meetings may be a point of disagreement within the Fed. Second, the recent further rise in long-end US Treasury yields, combined with a stronger dollar, has led to some degree of tightening in financial conditions. Rate-sensitive sectors such as real estate have been suppressed, meaning the market has effectively performed part of the monetary tightening function, helping to reduce the pressure on the Fed to act immediately and buying more time to observe inflation trends.
Recent remarks from Fed officials also reflect this inclination. Fed Governor Waller stated that further rate hikes remain necessary in the future, but there is still some flexibility on the timing of hikes; rate increases need not occur at consecutive meetings, but should be implemented within an acceptable timeframe. New York Fed President Williams said that one more rate hike this year may be appropriate, but whether further action is needed thereafter remains to be seen. Fed Governor Bowman believed that before deciding whether to continue raising rates, there is still time to assess changes in financial conditions and the economic situation. Overall, Fed officials have not denied the necessity of continuing to raise rates, but they tend to remain patient on the pace of hikes.
Chart 1: September CPI year-over-year growth rate rose. Source: Wind, CICC Research Department. Chart 2: Crude oil prices remained above $100 per barrel. Source: Wind, CICC Research Department. Chart 3: Core goods inflation regained upward momentum. Source: Haver, CICC Research Department. Chart 4: AI-related inflation pressures persist. Source: Haver, CICC Research Department. Chart 5: Housing rent inflation stickiness strengthened. Source: Haver, CICC Research Department. Chart 6: Non-housing core services inflation eased somewhat. Source: Haver, CICC Research Department.
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