The U.S. overall CPI increased by 0.2% seasonally adjusted month-on-month in September (previous value 0.2%), and the year-on-year rate fell back to 2.4% (previous value 2.5%); the core CPI increased by 0.3% month-on-month (previous value 0.3%), and rebounded to 3.3% year-on-year (previous value 3.2%), both higher than market expectations. We believe that the lack of further decline in the month-on-month inflation rate, combined with the strong non-farm data previously, may cause the Federal Reserve to slow down the pace of rate cuts. We predict that the Federal Reserve will cut rates by 25 basis points in November, and the guidance for future rate cuts will be more cautious. Our base case for the U.S. economy remains a soft landing, but the path to a soft landing will not be smooth, and inflation data fluctuations like today's may reoccur. The recent significant rebound in U.S. Treasury yields is a good reminder, and it also indicates that the pattern of U.S. dollar interest rates remaining high for a longer period has not changed.

In September, the overall CPI in the U.S. slowed down, but the core CPI rebounded year-on-year, and neither saw a further decline in their month-on-month growth rates, indicating that the downward trend in inflation still faces resistance. Looking at the breakdown, the non-rent core service inflation (supercore) that the Federal Reserve is most concerned about increased by 0.4% month-on-month in September, up from 0.3% the previous month, and has been accelerating continuously since June. Among them, the prices of motor vehicle repair (+2.8%), automobile insurance (+1.2%), and medical services (+0.7%) are accelerating. Airfare prices (+3.2%) saw a significant increase, and the prices of sports event tickets (+10.9%) jumped noticeably.

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The month-on-month increase in core goods prices rose to 0.2% (previous value -0.2%), mainly driven by the rebound in the prices of new and used cars. Among them, used car prices rebounded from -1.0% to +0.3% month-on-month, and new car prices rebounded from 0% growth to +0.2%. As we discussed in our inflation commentary last month, "Inflation Stickiness Does Not Support the Federal Reserve's Aggressive Easing," after the car sales software failure in June, the inventory of used and new cars has been somewhat tight, which may lead to a slight price recovery in the coming months, as reflected in leading indicators such as the Manheim Used Car Index. September also saw a significant increase in apparel prices (+1.1% month-on-month), but other goods such as furniture and home appliances (0%), medical goods (-0.7%), recreational goods (-0.3%), and educational and communication goods (-0.7%) are still experiencing price declines. This indicates that the supply of goods remains ample, and the likelihood of a significant price rebound in the short term is low.

The month-on-month increase in food prices in September rose to 0.4%, mainly driven by the rebound of home food prices from zero growth to 0.4%. Among them, egg prices have been growing continuously over the past three months, with month-on-month growth rates of 5.5%, 4.8%, and 8.4% in July, August, and September, respectively. The month-on-month growth rate of fresh fruits and vegetables also rebounded to 0.9%. As the election approaches, the rebound in food prices that ensure basic livelihood may be unfavorable for Harris. The good news is that, along with the decline in oil prices, energy prices fell significantly in September, which will play a positive role in reducing the cost of living for residents.

The month-on-month increase in rent in September fell back to 0.3% (previous value 0.5%). Among them, hotel prices fell sharply from a 2.0% increase last month to a -2.3% decrease. The seasonally adjusted month-on-month increase in primary residence rent fell back to 0.3% (previous value 0.4%), and the owner's equivalent rent fell back to 0.3% (previous value 0.4%). The slowdown in rent inflation is a good direction, but it may continue to be sticky in the future. One reason is that with the inflow of immigrants, their housing demand may continue to be released, supporting rent inflation.

Inflation fluctuations, combined with the strong non-farm data previously, may cause the Federal Reserve to slow down the pace of rate cuts. We believe the Federal Reserve will cut rates by 25 basis points in November, and the guidance for future rate cuts will be more cautious. Powell previously stated at the Jackson Hole conference that the labor force is no longer a source of inflation risk[1], but the rebound in employment and inflation data in September may weaken this view. We expect the Federal Reserve to continue cutting rates, but at a slower pace. The reason for continued rate cuts is that the Federal Reserve does not want to fall behind the curve, and the reason for slowing the pace is concern about a resurgence of inflation. On balance, it is more appropriate for the Federal Reserve to cut rates by 25 basis points at the next meeting.

For the U.S. economy, our base case is still hopeful for a soft landing, but the path to a soft landing will not be smooth, and inflation data fluctuations like today's may reoccur. This also serves as a good reminder that we should not over-extrapolate U.S. economic data linearly. The recent significant rebound in U.S. Treasury yields also indicates that the market's pricing of Federal Reserve rate cuts was too aggressive. We believe that the resilience of the U.S. economy still exists, and the pattern of U.S. dollar interest rates remaining high for a longer period has not changed.

Finally, we caution that employment and inflation data in the coming months may be disrupted by a new round of strikes and hurricanes. The initial jobless claims released on Thursday rose more than expected, which may have already partially reflected this impact. Under these circumstances, the Federal Reserve will be more cautious, and policymakers will pay more attention to the totality of data rather than taking action based solely on a single data point.