Author: pan Jingyu, financial analyst of China Foreign Exchange Investment Research Institute
Us inflation fell to 8.5 per cent in July from a nearly 40-year high of 9.1 per cent on Wednesday night, another decline in another upward trend since September last year. Although US inflation fell to 8.3 per cent in April from 8.5 per cent in March, the figure was higher than market expectations of 8.1 per cent. Inflation fell 0.6% in July from June, and the figure was less than the 8.7% that economists had expected.
The actual decline in US inflation should be expected by the market, but after the release of the data, the market expected the Fed to continue to raise interest rates in September and even this round of fast-paced expectations. The US dollar fell rapidly from 105.97 points to a low of 104.63 points, the three major US stock indexes rebounded more than 1.5% across the board, and US bond yields fell further. But the point is that the core CPI of the United States remains unchanged at 5.9% year-on-year, although it is less than 6.1% of market expectations, but the figure has not declined or means that there are still no clear signs of easing in US inflation.
First, the fall in oil prices has become the core factor of the downward inflation in the United States. The easing of inflation in the United States in July is mainly closely related to the fall in international oil prices, which are after all an important part of the inflation structure in the United States. The 4.6 per cent month-on-month decline in US energy prices during the month was at the heart of the easing in inflation, which was significantly offset by the monthly decline and outpaced the rise in food and housing costs. And the international oil price is highly synchronized with the trend of inflation in the United States. As a result, July New York crude oil futures fell for two consecutive months, although the decline slowed down from June, but still reached a range of 7%, which directly led to the decline of inflation in the United States. Meanwhile, US PPI fell last night for the first time in nearly two years in July, partly reflecting lower energy costs as a result of the overall fall in global commodity prices.
On the other hand, US natural gas prices rose sharply in July, mainly affected by hot weather stimulating US consumers' demand for cooling and power generation. But according to JPMorgan Chase & Co's analysis, consumer prices for household energy have usually changed only about 16 per cent of the change in natural gas prices over the past decade or so, and a sharp 250 per cent rise in natural gas prices may only boost annual inflation by about 0.5 per cent. As a result, the current surge in US natural gas prices actually provides relatively limited support for US inflation. However, if US natural gas prices rise further in the future, US inflation will also be affected to some extent.
Second, the core inflation in the United States remains relatively high due to internal factors. The moderation of core inflation relative to July's annual inflation rate is limited, after all, the core data remained unchanged at 5.9 per cent year-on-year in June. Among them, the contribution of high US housing prices to inflation is self-evident, while the housing sector accounts for 32% of the US inflation index, and housing belongs to the core inflation category.
As a result, the 5.7% rise in the US housing index in July became the focus of directly supporting core inflation. This is mainly due to the epidemic and the increase in interest rates raised by the Federal Reserve this year, which has increased the financial pressure and risk on residents to afford housing, so the re-influx of American consumers into the rental housing market has pushed up rental prices and costs. According to news, US rents are soaring at their fastest pace in more than three decades, with median rents exceeding $2000 for the first time and pushing rents in most big cities above pre-epidemic levels. From this point of view, the Fed's interest rate hike has had a two-sided impact on the US housing market, but the highly sought-after sentiment in the rental market will still support the upsurge of US core inflation.
At the same time, the tight US job market also has an impact on keeping core inflation high. After all, the US unemployment rate remained at a record low of 3.5 per cent in July, with employment reaching 153 million, the normal level before the epidemic. In particular, the employment situation in the US service sector is also recovering well, indicating that more and more people are returning to work. As a result, the reference factors for the Fed to raise interest rates and economic principles, the good situation in the job market will form an important factor that indirectly pushes up inflation. In the future, as the possible epidemic slows down or residents' willingness to work resumes, the US job market may maintain the current situation of close to full employment, which will also form the focus of US inflation or difficult to break 6%.
To sum up, it is expected that US inflation will continue to ease or rise in the future with wide fluctuations in oil and commodity prices, but it will be difficult to change the reality of high inflation in the short and medium term, no matter whether the future inflation data go up or down. At the same time, there is still a lot of pressure on the parameters of other indicators in the US inflation structure, and the overall trend in the job market means that core inflation, which the Fed is more concerned about, will remain high.
From this point of view, it is expected that there may be no reason for the Fed to slow down the pace of raising interest rates until at least the first half of next year, and each rate increase of 50-75 basis points will still be appropriate for the Fed, but it does not rule out the possibility that the Fed will aggressively raise interest rates by 100 basis points at a time. After all, the US economy is the direct factor that supports the Fed to dare to raise interest rates. Therefore, a further upward rise in US dollar interest rates will ease the inflationary pressure in the US and continue to lead the trend of global monetary policy, while a rise in US dollar interest rates or an increase in the return of global funds to the US will help ease the pressure on the US fiscal deficit. at the same time, in fact, this is also the key for the dollar to further dominate market funds.