CICC: US inflation stickiness has not receded, supporting the Fed's continued rate hikes

CICC released a research report stating that US October CPI rose 0.4% month-on-month on a seasonally adjusted basis (0.6% last month), and core CPI rose 0.3% month-on-month (0.3% last month), both above market expectations. The US government shutdown in October last year meant no economic data was published, so year-on-year data is missing. Overall, inflation stickiness remains strong, with core CPI rising 0.3% month-on-month for the third consecutive month, supporting the Fed's continued rate hikes. Recently, Fed Governor Waller suggested that a 50 basis point hike in December cannot be ruled out. However, the bank believes that Fed policy has not clearly "fallen behind the curve," and given that financial conditions have already tightened marginally, the need for accelerated rate hikes is not strong. The bank maintains its baseline judgment of a 25 basis point hike in December, and the current tightening pace remains gradual and moderate. CICC's main views are as follows: Energy inflation weakened marginally, food prices accelerated. October energy CPI rose 0.7% month-on-month, a sharp pullback from the 5.2% increase in September. Among them, gasoline prices rose 1% month-on-month and fuel oil prices rose 2% month-on-month, both significantly lower than September's increases, while natural gas pipeline services fell 0.8% month-on-month. However, electricity prices rose 0.9%, the highest since May this year. Against the backdrop of data center construction and growing electricity demand, electricity prices may face some upward pressure. October food CPI rose 0.5% month-on-month, the highest since May this year. Among them, food at home rose 0.4% and food away from home rose 0.5%. Food price increases had broad coverage, with prices of fruits and vegetables, dairy products, and meat all rising, rather than being driven by a single category. This may have been affected by the pass-through of earlier energy price increases. Core goods prices were generally moderate. Excluding energy and food, October core goods prices rose 0.2% month-on-month, slowing from 0.3% in September. Among them, new vehicles (0.2%), furniture (0.7%), and medical care commodities (0.5%) continued to rise, while used car prices fell 1.2%, the lowest level since February this year. Computer software and accessories prices fell 1.5% month-on-month, and the month-on-month growth rate of computers, peripherals, and smart home assistants slowed from 1.4% last month to 0.5%, indicating that AI inflation pressure has eased marginally. However, AI-related hardware prices are still rising, and subsequent price pressure remains to be seen. Rent inflation was generally stable. October housing CPI rose 0.3% month-on-month, slowing from 0.4% in September. Among them, owners' equivalent rent (OER) rose 0.3% and actual rent rose 0.2%, both unchanged from last month. Looking at leading indicators of rent, there are no signs of accelerating rent inflation. Non-housing core services inflation (supercore) remained sticky, with transportation services prices seeing larger increases. October non-housing core services prices rose about 0.4% month-on-month, basically flat from last month. Among them, transportation services prices rose 0.8% month-on-month, higher than 0.6% last month, but the price increase structure changed. Auto insurance prices rose 0.7% month-on-month, public transportation prices rose 2.0%, while airfare price increases slowed from 1.2% last month to 0.4%. In addition, medical services prices rose 0.3% and recreation services prices rose 0.9%, indicating that the sources of services inflation remain relatively broad and overall quite sticky. Looking ahead, as recent international oil price declines pass through, the pressure from energy costs feeding further into transportation and other services prices is expected to ease, but wage growth in manufacturing and construction has accelerated somewhat, and attention should be paid to whether a recovery in labor demand further pushes up wages in labor-intensive service industries, creating pressure for wages and services prices to reinforce each other. The bank believes that elevated inflation pressure supports the Fed's continued rate hikes, but the need for accelerated hikes is not strong. October core CPI rose 0.3% month-on-month for the third consecutive month, indicating that inflation stickiness remains strong and supporting the Fed's further monetary policy tightening. The bank also maintains its previous judgment: the Fed will raise rates again in December. Before the CPI data was released, Fed Governor Waller said that if October core CPI rose 0.3% or more month-on-month, a one-time 50 basis point hike should be considered to maintain the credibility of monetary policy. This data met his stated condition, and the market is somewhat concerned about this. The bank believes that a larger rate hike usually means policy adjustment needs to be accelerated to make up for insufficient prior tightening, but recent marginal tightening of financial conditions indicates that earlier tightening is already taking effect; at the same time, the month-on-month inflation growth in the past two months more reflects stickiness rather than accelerating increases, and the Fed does not need to accelerate tightening. In fact, Waller himself also supported pausing rate hikes at the October meeting; if he believed monetary policy was suspected of "falling behind the curve," he should have opposed standing pat at that time. One possibility cannot be ruled out: with the recent midterm election results in place and the Democrats winning a major victory, the pressure on the Fed has eased, and some officials may be inclined to act sooner to alleviate persistently high inflation. However, whether it is necessary to take a one-time 50 basis point hike still remains to be assessed. Even within the Fed, an aggressive rate hike strategy may not necessarily be supported by a majority of officials. Previously, the most hawkish Dallas Fed President Logan only believed that rates should be raised twice more, by 25 basis points each time. In summary, before more economic data is released, the bank's baseline scenario remains a 25 basis point hike in December, and this tightening cycle remains a gradual and relatively moderate tightening cycle.