© Reuters. CITIC Securities: The pace of U.S. inflation turning negative month-on-month may slow down again
Zhitong Finance APP was informed that CITIC Securities released a research report that US inflation continued to fall in December, and the month-on-month CPI growth rate turned negative, which was mainly dragged down by energy items, which was in line with market expectations. Residential items are still the most important contributor to inflation, and core service prices are sticky. It is expected that inflation readings will continue to fall in the short term driven by the prices of non-core items, and the Fed’s pace of interest rate hikes will further slow down to 25bps. The future market trend may fluctuate between falling inflation and tight employment. The current U.S. bond yields temporarily lack further room for a substantial decline.
Inflation in the United States will continue to fall in December 2022, and the CPI will turn negative month-on-month. All readings are in line with market expectations, and may be one step closer to the Fed’s “convincing decline” standard for inflation.
The U.S. CPI in December 2022 fell by 0.1% month-on-month after seasonal adjustment, the first time it has returned to the negative range since May 2020, mainly dragged down by energy items; the core CPI rose by 0.3% month-on-month after seasonal adjustment, a rebound from the previous value of 0.2%. Specifically, the rule of thirds:
1) The month-on-month growth rate of food prices further slowed down from 0.5% in November to 0.3%, contributing a 0.037 percentage point increase.
2) Energy prices continued to decline, falling sharply by 4.5% month-on-month in December, forming a drag of 0.354 percentage points. This was mainly due to a sharp 9.4% month-on-month drop in the gasoline index, while the natural gas index and the electricity index rebounded again, rising 3.0% and 1.0% month-on-month in December, respectively.
3) The month-on-month growth rate of core items rebounded, with a month-on-month increase of 0.3% in December, contributing a 0.237 percentage point increase. This is mainly due to the continued rise in housing prices, which rose by 0.8% month-on-month in December, contributing 0.262 percentage points. The year-on-year increase of 7.5% in residential housing is the largest since July 1982. However, as the Federal Reserve continues to raise interest rates, it is expected that the impact of the cooling of the US real estate market will gradually be transmitted to the residential sector, and the growth rate of residential sector prices will decline in the medium and long term. In addition, the core items other than residential items fell by 0.1% month-on-month, of which the price of second-hand cars fell by 2.5% month-on-month, which was the sixth consecutive month of negative month-on-month; the price of new cars also fell again, with a drop of 0.1%.
Inflation is sticky in services other than residential.
In December, the price growth rate of core service items and the price growth rate of core service items excluding housing both rebounded. Service items excluding residential items increased by 7.4% year-on-year (7.3% in November), indicating that the continued tight labor market has hindered the fall in inflation, and inflation in the US service industry is sticky. The U.S. jobless-to-employment ratio (the number of job vacancies corresponding to each unemployed person) is still around 1.7, the unemployment rate fell back to 3.5% in December, and the number of initial jobless claims and continuing jobless claims released at the same time as the December CPI data Both numbers were lower than expected, showing that the labor market remains resilient. We believe that there is no further room for U.S. bond yields to fall sharply after falling to the current 3.5%.
U.S. inflation continues to fall in the short term, and the pace of interest rate hikes by the Federal Reserve may further slow down to 25bps. Future market trends may fluctuate between falling inflation and tight employment.
In the short term, the sharp fall in gasoline prices has led to a continuation of the downward trend in US CPI, and the first negative year-on-year growth in nearly three years. The negative month-on-month CPI readings can support the Fed to continue to reduce the pace of interest rate hikes. Combined with the statement of Philadelphia Federal Reserve Chairman Harker that “there are signs that inflation is cooling and the core inflation rate is expected to drop to 3.5% in 2023” after the release of the CPI data, it is expected that the pace of Fed rate hikes will slow down at the interest rate meeting in late January and early February The probability of reaching 25bps is relatively high. In the medium and long term, before the labor market cools down sufficiently, the key to the future inflation trend in the United States will be the price trend of core services other than residential items. The key to the future trend of US inflation lies in the job market, and the market may be playing a game between falling inflation and tight employment.
