• For the month of August, the US CPI grew slower to 8.3% y/y, three months low, from 8.5% y/y in July 2022. Excluding food and energy items, the core inflation rose to 6.3% y/y, higher than 5.9% y/y in the previous month.

• Instead of our earlier view of 50bps hike this month, we now foresee a third straight 75bps interest rate hike.

US – The Fed to Maintain Its Tightening Path

For the month of August, the US CPI grew slower to 8.3% y/y, a three month low, from 8.5% y/y in July 2022. Still, it was faster than market expectations of 8.1% y/y. Excluding food and energy items, core inflation rose to 6.3% y/y, higher than the 5.9% y/y in the previous month and faster than market consensus of 6.1% y/y.

On a monthly basis, headline inflation grew 0.1% m/m (cons.: -0.1% m/m) compared to stagnant growth in the prior month. Core inflation grew faster than expected, chalking up 0.6% m/m (cons.: 0.3% m/m), faster than 0.3% m/m in July.

The lower headline inflation rate can be attributed to the much slower energy component, which increased only by 23.8% y/y (July22: 32.9% y/y), the slowest pace since March21. On the ground, annual changes of the retail gasoline price for August are significantly lower at 24.5% y/y compared to July’s 44.2% y/y.

However, some components remain elevated despite most timely data are showing alleviating price pressure. Shelter inflation rose 6.2% y/y, the fastest since 1986, (July22: 5.7% y/y), food inflation also increased to 11.4% y/y, the most since 1979, from 10.9% y/y in July22 and services inflation expanded 5.7% y/y (July22: 5.1% y/y).

Despite the slower inflation growth, we think that the Fed will continue on its tightening path. The most recent mixed labour market data, including reports showing companies already laying off their workers, and the slowing inflation rate does not guarantee that the Fed will pivot its narrative to supporting growth anytime soon.

We now expect the Fed to raise the borrowing costs faster and further than previously expected after data showing underlying inflation broadening out rather than cooling.

Instead of our earlier view of 50bps hike this month, we now foresee a third straight 75bps interest rate hike. The inflation level has been under-appreciating and still entrenched. Hence, the Fed will require stronger response.

This would lift the Fed’s current 2.25% - 2.50% policy rate range to 3.00% - 3.25% in September and the policy rate is poised to settle at 3.75% - 4.00% by end-2022 – whereby we are looking at 50bps hike in November and 25bps hike in December.

Should inflation remain a menace to the Fed, stronger rate hike will remain in December i.e., 50bps hike instead. Should that happen, the FFR will normalize at 4.00% - 4.25% by end-2022.

Source: AmInvest Research - 14 Sept 2022