BOCOM INTL: US CPI Still Has Upside Risk; Probability of a September Rate Hike Rises Further

BOCOM INTL released a research report stating that US core inflation accelerated month-on-month in August, and whether to hike rates remains a question. In August, US CPI rose 0.4% MoM, in line with expectations and a marked rebound from 0.1% in July, while YoY it rose 3.4%, unchanged from July; core CPI rose 0.3% MoM, above the expected 0.2%, while YoY it fell from 2.5% to 2.4%. Although core inflation on a YoY basis is still declining, its MoM trend is rising, from 0% in June and 0.2% in July to 0.3% in August, indicating that inflationary pressure has not yet subsided. The bank pointed out that looking ahead, there is still further upside risk to September CPI, with crude oil, diesel, and the resulting food and transportation costs likely to be the main drivers. Recently, WTI crude oil has risen back above $100, and US retail diesel prices have risen to near historic highs. The energy component was the main factor driving the rebound in headline CPI in August, but the impact of this round of energy shocks may not yet be fully reflected. By year-end, even if housing inflation continues to decline slowly, high energy prices and sticky services inflation may still keep headline inflation above 3%, and the pace of decline in core inflation may also be slower. The bank believes that a slightly stronger-than-expected core CPI, combined with a relatively strong August nonfarm payrolls report, has further raised the probability of a September rate hike. Before the data release, the market priced in about a 70% chance of a 25 basis point hike in September, which briefly rose to about 90% after the release and currently remains above 80%. After the CPI data was released, a rate hike became the dominant scenario in market pricing, but because Fed Chair Warsh has reduced forward guidance and tends to preserve policy uncertainty, a September rate hike cannot yet be regarded as fully certain. At the same time, since part of this round of new inflationary pressure comes from an energy supply shock, a rate hike cannot directly push oil prices down, and the Fed may still have reason to continue holding steady; however, if the energy shock spreads to core services, wages, or inflation expectations, the Fed may still choose to hike rates to curb second-round inflation and inflation expectations.