Tianfeng Song Xuetao: The United States is gradually approaching inflation.

In October, the overall CPI in the United States increased by 0.24% (expected 0.20%), while the core CPI increased by 0.28% (expected 0.30%), which is basically in line with expectations. The overall CPI has remained at 0.2% for four consecutive months and the core CPI has remained at 0.3% for three months. The strong inflation stickiness is accompanied by the inflation diffusion index rebounding to its highest point since 2024Q2, presenting more resistance to disinflation. The rebound in housing inflation and the relative stability of other core services indicate that the inherent momentum of inflation is still continuing. However, the expectation from the media that the October CPI may exceed expectations did not materialize as broad core commodity prices (especially clothing) continue to decline, and car insurance unexpectedly experienced negative growth on a month-over-month basis (-0.1%, previous value 1.2%). The potential downward trend in energy prices also bodes well for disinflation. Overall, the current inflation risks in the United States show asymmetry, with greater upward risks than downward risks. The core CPI is above the Fed's target level on a month-over-month basis, and its annualized level has rebounded continuously for three months. Housing inflation has rebounded once again (month-over-month 0.38%, previous value 0.22%), and recent mortgage rates have followed the long-term rates upward, indicating that the pace of releasing existing homes will be slower. Used car prices increased significantly on a month-over-month basis (2.7%, previous value 0.3%) under the influence of seasonal adjustment factors. Additionally, it shouldn't be ignored that U.S. car sales hit a new high since June 2021 in October, stable demand and price wars will further support price stabilization as inventory gradually depletes. As the monetary easing strengthens the balance sheets of the private sector, the demand and price will face upward risks higher than the downward risks posed by excessive tightening on the economy. With increasing confidence, the release of credit, and stable real wage income, the slow downward trend of inflation could be reversed at any time, particularly concentrated in the non-tradable sectors with a higher share of consumption. Trump's policies will further enhance the upward risks of inflation. According to the National Retail Federation, since Trump took office, direct impact from tariffs on non-tradable sectors will raise core commodity prices by around 10%; and restrictions on immigration will affect the supply of low-skilled services in non-tradable sectors. From the pace at which Trump swiftly appointed officials in the past, the realization of his policies is anticipated to be faster than expected. Considering the difficulty of policy implementation, we tend more towards "inflation first, growth follows." This suggests that before the so-called "Reagan loop" is formed, the U.S. may enter a stagflationary environment first. U.S. monetary policy needs to strike a balance between the magnitude and pace of rate cuts: rates need to remain at relatively high levels for a longer period of time, and faster rate cuts imply a higher terminal rate. In response to the uncertainty surrounding Trump's policies, Powell's response is a good choice: "We don't guess, we don't speculate, and we don't assume." If there is one thing that is certain, it is that "avoiding a recession in the United States" may be one of the few consensuses that Trump and the Fed can reach. This also sets an unseen floor for long-term interest rates in the United States: investors who believe that Trump can bring about the "three highs cycle" continue to trade out higher real rates to reflect stronger future economic growth, while investors who expect Trump to trigger noticeable re-inflation will further increase inflation expectations. Risk indicators: Labor supply recovery in the U.S. falls short of expectations, rate cuts in the U.S. exceed expectations, significant deviation in U.S. wage growth estimates. This article was reprinted from the "Xue Tao Macro Notes" public account, and edited by GMTEight: Jiang Yuanhua.