Zhongjin: Mild inflation opens the door for the Federal Reserve to cut interest rates in December.

CICC released a research report stating that the overall CPI in the United States increased by 0.2% month-on-month in October (previous value 0.2%), rebounding to 2.6% year-on-year (previous value 2.4%); core CPI rose by 0.3% month-on-month (previous value 0.3%), remaining steady at 3.3% year-on-year, all in line with market expectations. CICC believes that the lower-than-expected non-farm payroll data this month due to hurricane disruptions, combined with expected inflation, have at least opened the door for the Fed to cut interest rates in December. However, CICC also stated that short-term disturbances may make the employment and inflation data announced this month not the most critical factors affecting the Fed's interest rate decision in December. It is still necessary to closely monitor the last non-farm payroll and inflation data released before the December meeting. If both exceed expectations, the Fed may retain the flexibility to "skip" the interest rate cut in December. Looking ahead, the main source of upward inflation risk in the future will be the policy trends after Trump took office. If Trump's policy inclination is relatively mild, the inflation risk in the United States will still be relatively manageable. However, if he aggressively implements policies such as imposing tariffs and expelling immigrants, it may increase domestic goods and services costs, leading to higher inflation risk. CICC's main points are as follows: The overall CPI in the United States rebounded year-on-year in October, while core CPI remained steady year-on-year. Both have maintained the same growth rate for the third consecutive month, showing that while there is not much upward risk in inflation, there is still some stickiness. Looking at individual items, core services inflation (supercore) that the Fed is most concerned about, declined from 0.4% last month to 0.3% this month. The rebound in the year-on-year growth rate in the past three months from 3.8% to 4.3% still falls short of the 2% inflation target, indicating that the recent downward trend in service inflation is not as smooth as the Fed would hope. Notable increases were seen in categories such as car repairs (+1.3%), entertainment services (+0.7%), airline ticket prices (+3.2%), postal services (+3.9%), and medical services (+0.4%); while car insurance prices, which had been strong, declined by 0.1% month-on-month in October, but the year-on-year growth rate remained at a high of 14%. The month-on-month growth rate of core goods prices fell to 0% (previous value 0.2%), with used car prices rebounding but prices of clothing, appliances, and other items declining. Specifically, the month-on-month growth rate of used car prices accelerated from 0.3% to +2.7%, which fits the analysis in the previous inflation review "Inflation Oscillation, Fed Should be Cautious in Cutting Rates". After experiencing software malfunctions in June's car sales, there has been some tightening in used and new car inventories, which may lead to a slight price rebound in the coming months, as reflected in leading indicators such as the Manheim used car index. However, the latest Manheim used car index has clearly turned negative month-on-month, indicating that the year-end inflation may benefit from some downward pressure on used car prices. Looking at other goods, clothing prices (-1.5%) in October showed a significant decline, while other products such as curtains (-3.5%), appliances (-0.6%), medical goods (-0.2%), and toys (-0.5%) continued to decline. This indicates that supply of goods remains ample, with affordable products from countries like China helping to keep inflation in the United States subdued. The possibility of a significant rebound in goods prices in the short term is low. However, looking ahead, if the new President Trump aggressively promotes tariff policies, it may raise the prices of imported goods in the U.S., transforming core goods prices from a "drag on inflation" to an "inflation booster." The month-on-month growth rate of rent rebounded to 0.4% in September (previous value 0.3%). Hotel prices, after a 2.3% decline last month, turned positive to 0.5%. The main residence rental seasonally-adjusted month-on-month growth rate remained steady at 0.3%, while equivalent rent for homeowners rebounded to 0.4% (previous value 0.3%). CICC has previously warned that rental inflation may continue to be sticky in the future. One reason is that leading indicators from private firms like Zillow show that rental inflation may not decline rapidly in the near future. Another more fundamental reason may be that with immigration inflows, the demand for housing may continue to be released, supporting rental inflation. In summary, this data shows that inflation is generally in line with expectations, with minimal short-term upward pressure. It is not the Fed's "greatest challenge" at the moment, as the Fed still focuses mainly on the labor market. Considering that there are still risks on the employment side, CICC believes it is still possible for the Fed to continue lowering interest rates by 25 basis points in December. However, continuous disturbances from hurricanes and strikes in October lead CICC to believe that the employment and inflation data announced this month may not be the most critical factors affecting the Fed's rate cut decision in December. CICC suggests closely monitoring the last non-farm payroll and inflation data released before the December meeting, as the next inflation data may provide clearer guidance for the Fed's assessment and balancing of risks in both employment and inflation after extreme weather conditions and other short-term factors have passed. If they still broadly meet expectations, the Fed can further lower interest rates for a "soft landing", but if they both exceed expectations, the Fed may also retain the flexibility to "skip" the interest rate cut in December in case inflation risks resurge. Looking ahead, CICC predicts that the Fed will continue to lower interest rates in 2025, returning monetary policy to a neutral stance. Even if the Fed lowers interest rates by 25 basis points in December as expected, it may not provide overly dovish guidance for next year's rate cuts in the dot plot. CICC believes that the federal funds rate may be lowered to 3.75% to 4% by the end of the second quarter of next year, after which the Fed may stop cutting rates and adopt a wait-and-see approach. This level is about 150 basis points higher than the pre-epidemic neutral rate and also higher than the current market's consensus expectations. Additionally, the economic policies of the new U.S. government will be a key variable affecting 2025, with the main source of inflation risk in the future focused on the implementation of policies after Trump took office. CICC expects that under his leadership, the government may adopt measures such as reducing taxes domestically, imposing tariffs externally, expelling illegal immigrants, and promoting fossil energy, all of which could keep the U.S. economy growing but also potentially elevate inflation. If Trump's policy inclination is relatively mild, then the inflation risk in the U.S. will still be relatively manageable. However, if he aggressively implements policies such as imposing tariffs and expelling immigrants, it may significantly increase inflation.Raising the cost of American goods and services will bring further inflation risks. Overall, CICC reiterated that US interest rates may remain high for a longer period of time, low interest rates are not the norm of this era.Je suis dsol, je ne parle pas franais.