Surprisingly, the Federal Reserve still wants to continue raising interest rates?, Both the overall and core CPI of the United States have fallen to new lows | year-on-year | new lows

The latest data shows that the trend of continuous slowdown in US inflation has not changed, and the Federal Reserve's interest rate hike cycle may soon come to an end.

On the 12th local time, the US Department of Labor released the latest data, stating that the Consumer Price Index in June increased by 3.0% year-on-year, a decrease of one percentage point from the previous 4%, the smallest increase since March 2021, with an expected value of 3.1%. This indicator reached its peak of 9% in June last year and has since decreased continuously for 12 months. On a month on month basis, the CPI rose by 0.2% in June, with an expected value of 0.3% and a previous value of 0.1%.

After excluding volatile food and energy prices, the core CPI in June increased by 4.8% year-on-year, the smallest increase since August 2021, lower than the expected 5.0%, and the previous value was 5.3%; On a month on month basis, the core CPI in June increased by 0.2%, with expected and previous values of 0.3% and 0.4%, respectively.

UBS US economist Deutmeister told First Financial reporters that although significant progress has been made in combating inflation, there is still a gap compared to pre pandemic and Federal Reserve target levels.

"Over the past year, the slowdown in inflation has been mainly driven by energy, with food prices and core inflation gradually easing. The vast majority of the core CPI increase from April to May was contributed by the housing and second-hand car sub sectors. In June, second-hand car prices fell, but rents continued to rise," said Detmeister.

Housing remains the main driver of inflation

In terms of sub items, the housing sub item with a weight of over one-third is still the main force behind the rise in US prices. Last month, this sub item contributed more than 70% of the overall price increase, a month on month increase of 0.4% and a significant increase of 7.8% compared to June last year; In addition, the sub items of car insurance, clothing, entertainment, and personal care also rose last month; Airtickets, communications, used cars, household items, etc. are among the price reductions.

After a significant drop of 3.6% in May, the overall energy price rebounded by 0.6% in June. Among them, gasoline prices increased by one percentage point month on month, and in May, the price of this sub item fell by 5.6%. Electricity prices increased by 0.9% last month, ending the three consecutive months of decline.

US June Consumer Price Index

Schroder Investment Chief Economist and Strategist Wade explained to First Financial reporters the four inflationary challenges faced by the Federal Reserve: a lower starting point for the first rate hike, a more relaxed financial environment than expected, a massive fiscal stimulus, and changes in spending and consumption caused by the pandemic.

"Among them, the low starting point of interest rates, the generous government relief, and the special impact of the epidemic are very unique, making it difficult for the Federal Reserve and other central banks to control the economy and inflation. The Federal Reserve must eliminate the abnormal effects of fiscal and epidemic on the consumption and employment markets." Wade said.

Inflation is still above the Federal Reserve's target level of 2%, and last week's non farm report pointed to the resilience of the job market, indicating that the Federal Reserve will continue to fulfill its promise to raise interest rates.

On the 7th, the latest non farm payroll data released by the US Department of Labor showed that in the past six months, an average of 278000 new jobs were added per month, and the June unemployment rate was 3.6%, which is at a historical low. The average hourly wage accelerated to rise, with a month on month increase of 0.4%.

Wade believes that the pandemic has had a profound impact on the supply side. "The early retirement, return to campus, or long-term illness of the labor force has led to a decrease in the labor force, a decrease in overall labor participation rate, and a sudden shortage of manpower, resulting in higher than expected pressure on wage increases. Overall, the pandemic has reversed the balance between supply and demand, exacerbating inflationary pressures," Wade said.

The resumption of interest rate hikes in July is firmly established

Despite the monthly cooling of inflation, Federal Reserve officials and investors do not believe that the above report will affect interest rate decisions later this month. On the 10th, Cleveland Fed Chairman Mester and St. Louis Fed Chairman Daley both expressed hawkish positions.

Mester stated that it is currently expected that the inflation rate will continue to exceed the Federal Reserve's target for four years. To ensure that inflation continues to fall to 2% in a timely manner, it is necessary to further raise interest rates from the current level and maintain it for a period of time. "The degree of upward inflation has been surprising for some time now. I believe a more tightening stance will help achieve a better balance between the risks of over tightening and under tightening." She said that the Federal Reserve's forecast released last month showed that the inflation rate will still be slightly above 2% by the end of 2025.

On the same day, Daley also stated that in the face of a strong job market, it may be necessary to raise interest rates twice this year to cool down the excessively high inflation. She believes that the risk of insufficient tightening is still greater than excessive tightening, but the two are achieving a better balance, so it is appropriate for the Federal Reserve to slow down the pace of interest rate hikes compared to last year, which can evaluate the economic response.

The Federal Reserve will release its latest interest rate decision on July 26th. According to the Chicago Mercantile Exchange's interest rate observation tool, as of press release, traders are betting that the probability of the Federal Reserve staying put is only 8.9%, and the probability of raising interest rates by 25 basis points to a 22 year high of 5.25% to 5.50% is 91.1%.

Wade said that in terms of the rate of interest rate hikes, the market generally describes this round of interest rate hikes as very aggressive. However, given that interest rates have been at a relatively low level for a long time, it is believed that it will take some time to raise them to restrictive levels. Therefore, the time required for the first rate hike to have an impact on the economy has been extended. He further stated that the biggest reason for the Fed's "rest" last month was to observe the tightening effect so far. The post meeting statement and economic forecast clearly indicate that the Federal Reserve is only temporarily suspending its actions, rather than shifting towards lowering interest rates.

The probability of the Federal Reserve raising interest rates in July