On March 12th local time, the US Bureau of Labor Statistics released data showing that the Consumer Price Index (CPI) of US residents in February increased by 3.2% year-on-year, higher than the market's previous expectation of 3.1%; The month on month increase increased from 0.3% in January to 0.4% in the previous month. After excluding volatile food and energy prices, the core CPI increased by 3.8% year-on-year, a decrease of 0.1 percentage points from the previous month, which is the smallest annual increase since May 2021; The month on month increase remained unchanged from the previous value, at 0.4%.
Analysts point out that the year-on-year growth rates of inflation and core inflation in the United States in February exceeded market expectations, mainly due to the rebound in rent and energy prices, with both housing and gasoline prices accounting for over 60% of the February growth. The sustained strong inflation data in the United States has strengthened the necessity for the Federal Reserve to maintain policy interest rates for a period of time to observe the data.
After the data was released, the Chicago Mercantile Exchange's Federal Reserve Watch Tool showed that the implied probability of federal fund futures with a rate cut in June remained unchanged at 71%. The yield of 10-year US Treasury bonds fluctuated first and then rose, with the US dollar index strengthening to over 103 at one point.
Energy prices are an important factor driving up the US CPI in February, and controlling inflation in the US is still in a difficult period
From a detailed perspective, the overall energy expenditure of the United States in February increased by 2.3% month on month, with a previous value of -0.9%, contributing 24.5% to the overall month on month growth.
The macroeconomic team of Dongwu Securities believes that energy prices are an important factor driving the overall CPI increase this time. The energy inflation turnaround accelerated in February. According to data from the American Automobile Association, the price of regular gasoline increased by about 20 cents compared to a month ago, with a growth rate of over 6%, becoming the main reason for the rebound in energy prices. Although energy does not account for the largest proportion of the overall CPI, oil prices not only affect commodity prices but also extend to other service prices, which will also raise inflation expectations and exacerbate inflation risks.
In addition, housing rent remains the largest contributor, but the growth rate has slowed down. The housing sub CPI increased by 0.5% month on month in February, and the resilience of housing inflation remains the main driving force behind the core CPI. However, compared to the jump in housing sub item growth rate in January, the growth rate in February has significantly slowed down.
Qin Tai, Assistant Director and Chief Macro Analyst of Huajin Securities Research Institute, believes that from the perspective of overall CPI, the rise in crude oil prices since the beginning of the year is being transmitted to energy CPI in a more direct path. The latter saw a month on month increase of 2.3% in February, setting a new high in nearly six months. After sticking to a narrow range of 3.1% -3.3% for five consecutive months, the overall decline in year-on-year growth rate of the US CPI is still not a smooth path.
Chen Xing, Chief Macro Analyst at Caitong Securities, pointed out that the US CPI slightly rebounded in February, mainly due to the rebound in energy prices. However, overall, inflation is still in a downward trend.
According to He Ning, Chief Economist at Open Source Securities, overall, the US disinflation process may be in a "tough period" in the short term. Although the current inflation level is moving towards the Federal Reserve's goals, there may still be a lot of uncertainty in the required duration.
February US inflation data exceeding expectations may make the Federal Reserve more cautious
Qin Tai pointed out that whether the US inflation data can stabilize and quickly fall back to the long-term target range of 2% is the most important determining factor when the Federal Reserve will make its first interest rate cut decision. The unexpected performance of February data may make the Federal Reserve more hesitant and cautious.
Chen Xing pointed out that after the release of February inflation data, the market's overall expectation of the Federal Reserve's target interest rate path has shifted upwards, and the first rate cut is expected to take place in June. In addition, the previously released February non farm employment data showed signs of cooling in the labor market. Recently, Federal Reserve Chairman Powell stated in his speech that there is no need to wait for inflation to reach 2% before lowering interest rates. Considering that the impact of high interest rates on various sectors of the economy may gradually become apparent, future economic growth will continue to slow down, and the first rate cut by the Federal Reserve may take place in June.
Looking ahead, for the Federal Reserve, the "last mile" of de inflation is still full of challenges, and there is still a certain distance from the 2% target. Whether calculated based on the month on month assumption of 0.3% or 0.2%, the probability of the US CPI continuing to decline is likely to drop to the 2.4% -2.5% range in August, which is still some distance from the Federal Reserve's 2% target, and there is also a risk of rebound.
Yan Xiang, Chief Economist of Huafu Securities, pointed out that the market has already anticipated a 100 basis point (bp) interest rate cut in June, but if inflation slows down in the future, it means that the interest rate cut point may continue to be delayed.
The US economy is currently in a sustained downturn, with significant declines in non farm employment and PMI (Purchasing Managers Index), and inflation may remain relatively high in the short term. Therefore, the Federal Reserve does not need to wait for inflation to drop to 2% before starting to lower interest rates, but it needs to see clear signs of economic cooling, especially significant cooling in PMI, non-farm employment, etc. Currently, it still needs to wait. If the subsequent decrease in inflation is lower than expected, it is not ruled out that the interest rate cut node will continue to be postponed to July or later September.
He Ning pointed out that the current round of disinflation in the United States may be a relatively long-term process, but as the disinflation process continues, the level of real interest rates is also increasing. As long as the disinflation process does not experience significant fluctuations, the Federal Reserve may be more inclined to implement "preventive interest rate cuts" to avoid sustained pressure on the economy under restrictive interest rate levels.
Under benchmark conditions, while the disinflation process has not reversed, there is still a tendency to believe that the Federal Reserve will conduct its first interest rate cut in June, but the pace and magnitude of subsequent rate cuts will be relatively flexible, and the overall magnitude will not be significant. However, from a medium-term perspective, the interest rate level of the Federal Reserve may be significantly higher than pre pandemic levels.