The United States announced earlier that the inflation rate (CPI, consumer price index) in June was 9.1% year-on-year compared with last year, hitting a 41-year peak. In July, the inflation rate fell to 8.5%. The latest August inflation rate, released on Tuesday, rose 8.3% year-on-year. After the news came out, U.S. stocks plummeted, with the Dow Jones Index tumbling 1,276 points, or 3.9%. Why does the U.S. inflation rate continue to fall, but the market is still afraid that the Fed will raise interest rates sharply to fight inflation and plummet? There are three main reasons:
1. MoM increase. When you see that the US CPI in August compared with the same period last year (year-on-year), it fell 0.2 percentage points from July, but if compared on a monthly basis (month-on-month), the CPI in August increased by 0.1 percentage points from July. When everyone sees that the US CPI in August fell year-on-year, in fact, the CPI in August was still rising month-on-month, showing that US inflation has once once more turned upward instead of downward, and the upward momentum of inflation has not been curbed. Specifically, housing costs, food prices and healthcare service prices in the U.S. in August were the main drivers behind the rise in the overall CPI.
2. Higher than expected. Economists surveyed by The Wall Street Journal had expected the CPI to fall by 0.1 percentage point month-on-month, but instead it increased by 0.1 percentage point month-on-month; in addition, the market had expected the CPI to rise by 8.1% year-on-year in August. It was up 8.3% year-on-year, and the market was of course disappointed.
3. The core inflation rate is pumped up. The Fed pays more attention to the core inflation rate, which excludes volatile food and energy prices. In August, the core CPI rose by 0.6% month-on-month, an increase of 0.3 percentage points from July; the core inflation rate increased by 6.3% year-on-year, an increase of more than 5.9% in July also significantly expanded. After falling back from April, the US core inflation rate is now showing a clear upward trend once more.
Year-on-year U.S. core inflation rose to 6.3% in August from 5.9% in July, underscoring that inflation is entrenched in the economy, at least in the short term, and is more than triple the average core inflation in the decade before the pandemic.
From this point of view, Fed Chairman Powell’s “hawking” at the Jackson Hole Global Central Bank Annual Meeting on August 25 is not aimless. He should receive some leading data on US inflation and know that US inflation is not under control. He stressed at the central bank’s annual meeting at the time that the Fed vowed to “use our tools forcefully to combat inflation that is still hovering near more than 40-year highs.”
Powell recalled Volcker’s experience at the Fed in the early 1980s, saying that historical records strongly warn once morest premature easing. Powell said higher interest rates might continue “for a while” even if it would cause “some pain” in the U.S. economy.
Recalling the sharp rise in U.S. inflation that year, then-Federal Reserve Chairman Volcker raised the U.S. benchmark interest rate, the federal funds rate, to 20 percent to control inflation. Today’s federal funds rate ranges from 2.25% to 2.5%. Federal Reserve Chairman Jerome Powell believes that if the Fed is not firm enough to maintain hawkish policy now, it will repeat the mistakes of 14% inflation in May 1980.
After the US inflation rate was announced in August, it is estimated that the probability of the Fed raising interest rates by 0.75% in September has risen to 82%, and there is even an 18% probability of raising interest rates by 1%.
America has a nightmare of rate hikes. Fitch Ratings chief economist Brian Coulton said the Fed is aware of the real risks of entrenched and systemic inflation and that aggressive action is needed. He expects the federal funds rate to rise to regarding 4 percent by the end of this year (1.5 percent higher than now) and remain there for a longer period of time, with a rate cut at least in the second half of next year or later. The conditions for triggering a shift in monetary policy are that the Fed needs to see a clear cooling trend in inflation, especially in the service sector, and is confident that this cooling is sustainable, and needs substantial data support.
Hong Kong is happier, without the high inflation of 8.3% in the United States. Hong Kong’s CPI in July rose by 1.9% year-on-year, 0.1 percentage points higher than the 1.8% in June. Inflation in the mainland is not high, and the CPI in August rose by 2.5% year-on-year, down 0.2 percentage points from 2.7% in the previous month.
However, the United States has raised interest rates wildly, and Hong Kong has to suffer, and has to bear the pressure of interest rate hikes and capital outflows.
Lu Yongxiong
