Tianfeng: Increasing asymmetrical risks in US inflation, long-term interest rates have a "hidden floor".

Tianfeng released a research report stating that there is asymmetric risk in the dynamics of US inflation, and Trump's policies may further exacerbate this imbalance. If the deflation process in the US from 2023 to 2024 is a competition between accelerated contraction of goods and slowed inflation of services, then the inflation process in 2025 will be a race between the implementation rates of tariff policies and relaxed regulatory policies. We are more inclined towards "inflation first, growth later". If there is anything relatively certain, then "avoiding a US recession" is one of the few consensuses that Trump and the Fed can reach, which also sets an invisible floor for US long-term interest rates. The main points of Tianfeng are as follows: The overall CPI in the US recorded a month-on-month growth of 0.24% in October (expected 0.20%), while the core CPI recorded 0.28% (expected 0.30%), which is basically in line with expectations. The previously exaggerated October CPI did not materialize as expected; meanwhile, the overall CPI has remained at the 0.2% level for four consecutive months, and the core CPI has also remained at the 0.3% level for three consecutive months. Such strong inflation stickiness is accompanied by a rebound in the inflation diffusion index to the highest level since Q2 2024, making the deflation face more resistance. Structurally, the rebound in housing inflation and the relatively stable core services imply that the underlying supply-demand relationships that reflect intrinsic momentum are still ongoing. This is a report on inflation that satisfies both hawkish and dovish viewpoints, as they can find details to strengthen their own arguments, and other data in the inflation report is unlikely to reverse their hawkish or dovish stance. From a hawkish perspective, the core CPI is still above the Fed's target level month-on-month, and the three-month annualized level continues to rise. Housing inflation has risen again (0.38% month-on-month, previous value 0.22%), and recent mortgage rates have followed long-term rates upward, indicating that the pace of housing supply release will be slower. Second-hand car prices (2.7% month-on-month, previous value 0.3%) have increased significantly due to seasonal factors, and it is also worth noting that US car sales in October reached a new high since June 2021, stable demand and price wars will further support price stabilization as inventory gradually depletes. From a dovish perspective: the core CPI has stopped its consecutive rebound; prices of general core goods (especially clothing categories) are still declining. The unexpected month-on-month decrease in auto insurance (-0.1%, previous value 1.2%) also contributes to the deflation process of the super core, and the potential downward trend in energy prices will also benefit the overall deflation process in the US. There is asymmetric risk in the dynamics of US inflation, and Trump's policies may further exacerbate this imbalance. If the deflation process in the US from 2023 to 2024 is a competition between accelerated contraction of goods and slowed inflation of services, then the inflation process in 2025 will be a race between the implementation rates of tariff policies and relaxed regulatory policies. Considering the difficulty of policy implementation, the bank is more inclined towards "inflation first, growth later". US monetary policy needs to balance between the extent and pace of rate cuts: a lower target requires more time, while faster rate cuts imply a higher terminal level. As rate cuts further strengthen the balance sheets of the private sector, the upside risks faced by demand and prices will be higher than the downside risks of excessive tightening on the economy. With increasing confidence, credit release, and stable real wage income, the slow decline in inflation could be reversed at any time, especially concentrated in non-trade sectors with a high share of consumption. According to the American Retail Association forecast, the direct impact of Trump's tariffs on tradeable sectors after taking office will increase core goods prices by around 10%; it will also impact the supply of low-skilled services in the non-tradeable sector by restricting immigration. Therefore, the bank does not consider deflation to be heading in the right direction, or that many assumptions need to be made about Trump's policies. Based on the current pace at which Trump is appointing officials, the speed of policy implementation may be faster than expected. This means that before forming the so-called "Reagan big cycle", the US may enter a stagflation environment; the current inflation dynamics do not oppose the realization of this path. Given so many assumptions and uncertainties about the impact of Trump's policies on the global economy, Powell's response is a good choice: "We don't guess, we don't speculate, and we don't assume". Monetary policy is shifting towards data dependence for feedback on the real economy, and towards countermeasures for fiscal policy. If there is anything relatively certain, then "avoiding a US recession" is one of the few consensuses that Trump and the Fed can reach. This also sets an invisible floor for US long-term interest rates: investors who believe that Trump can bring the "three highs big cycle" continue to trade out at higher real rates to reflect stronger future economic growth, while investors who believe Trump will trigger noticeable re-inflation will further raise inflation expectations. Risk warning: US labor supply recovery falls short of expectations, US rate cuts exceed expectations, significant deviations in US wage growth estimates.