CICC: It is expected that the Federal Reserve may cut interest rates by 25 basis points in October and December

According to the Zhitong Finance APP, CICC released a research report stating that the U.S. September CPI adjusted month-on-month increased by 0.3%, year-on-year rising to 3.0%, and the core CPI increased by 0.2% month-on-month, year-on-year rising by 3.0%, which is lower than market expectations. From a breakdown perspective, rent and used car prices have a significant drag, reflecting weakened related demand. CICC speculates that this is related to Trump's policies of restricting and deporting immigrants. The prices of goods affected by tariffs fluctuated, but the speed and magnitude of price increases were lower than CICC's previous expectations. This also reflects weak terminal demand, making it difficult for companies to pass on tariff costs to consumers. Service inflation remains robust. Overall, this inflation data is relatively mild, supporting the Federal Reserve's continued interest rate cuts. Given the downward risks in the labor market, CICC expects the Federal Reserve to cut rates by 25 basis points in October and December.

The year-on-year growth rate of the overall CPI in the U.S. returned to above 3% in September. The energy price index adjusted month-on-month increased by 1.5%, mainly driven by gasoline prices (+4.1%). Considering the decline in global crude oil and U.S. gasoline retail prices since October, the overall energy inflation pressure is manageable. The month-on-month increase in food prices slowed to 0.2%.

The core CPI rose by 3% year-on-year in September, slightly down from 3.1% in August. Among them, rent and used car prices have a significant drag, reflecting weakening demand. Owners' equivalent rent (OER) increased by only 0.1% month-on-month, the lowest monthly increase since January 2021; the rent for primary residences increased by 0.2% month-on-month, which is also low. Used car prices decreased by 0.4% month-on-month. CICC believes this may be related to Trump's policies restricting immigration—immigration inflows often promote rental demand and used car purchasing demand, while the opposite would suppress demand, thereby restraining rent and used car price increases.

Recently, U.S. used car retailer Tricolor and auto parts company First Brand have successively gone bankrupt, which also reflects the aforementioned impact. Tricolor mainly provides high-interest subprime auto loans to low-income, no credit record illegal immigrants in the southwestern U.S.; First Brand focuses on providing affordable auto repair parts. As the Trump administration strengthens deportation policies, population loss combined with a weakened employment environment has led to weakened consumption demand among low-income groups, accelerating debt defaults and business closures.

The prices of goods affected by tariffs fluctuated. Prices for clothing (+0.7%), furniture and bedding (+0.9%), home appliances (+0.8%), and entertainment products (+0.4%) all increased, indicating that the market is still gradually digesting tariff costs. The prices of electronic devices, especially mobile phones (-2.2%), saw a significant decline. Overall, core commodity prices increased by 0.2% month-on-month, with a year-on-year growth rate maintained at 1.5%, unchanged from last month.

Overall, the speed and magnitude of tariff transmission are lower than CICC's previous expectations. One reason is weak terminal demand, making it difficult for companies to pass on tariff costs to consumers. Some companies report that they even need to lower prices to retain customers. Another reason is that some companies may evade tariffs by underreporting the value of imported goods. For example, The Wall Street Journal previously reported that appliance manufacturer Whirlpool reported its South Korean competitors for underreporting the value of goods, with the average declared value of washing machines imported from South Korea plummeting from $838 to $73 CICC does not rule out the possibility of similar tariff evasion behaviors existing in other categories.

Service inflation remains robust. The month-on-month increase in core services (supercore) prices, excluding rent, rose from 0.3% last month to 0.4%, while the annualized three-month month-on-month growth rate increased to 4.7%. Airfare prices (+2.7%) remain resilient, with several airlines recently reporting better-than-expected performance and stating that demand for air travel has significantly improved from the sluggish state at the beginning of the year, indicating further room for airfare increases; prices for medical services (+0.3%), entertainment services (+0.4%), daycare and kindergarten (+1.7%), and hairdressing and personal care services (+0.9%) also remain sticky. Due to immigration policies reducing labor supply, CICC expects that prices in these labor-intensive service industries will be difficult to decline.

Overall, the September inflation data is relatively mild, supporting the Federal Reserve's continued interest rate cuts. Although the official non-farm payroll data has been delayed due to the government shutdown, other data such as ADP's small non-farm payrolls indicate that the labor market is still weakening. Coupled with the impact of the government shutdown, the Federal Reserve is particularly concerned about employment risks. In contrast, inflationary pressures are still in the accumulation phase, and the risk of "inflation" is temporarily not as significant as "stagnation." Therefore, CICC expects the Federal Reserve may cut interest rates by 25 basis points in October and December to prioritize addressing the continuously weakening labor market.

In the medium term, against the backdrop of supply contraction and demand slowdown in the U.S., inflation is unlikely to rise comprehensively and significantly as it did in 2021, but the central tendency may remain around 3%, showing stronger stickiness. Although the September inflation data was below market expectations, both core and overall CPI year-on-year growth rates have returned to above 3%, still significantly distant from the Federal Reserve's 2% target. Additionally, consumer inflation expectations may have been subtly anchored at a higher level, which also implies that the potential risks of inflation still lean upward.

Chart: U.S. core and overall CPI inflation rates are both at 3%

Source: Haver, CICC Research Department

Chart: Month-on-month increase in core goods fell from 0.3% to 0.2%

Source: Haver, CICC Research Department

Chart: Significant decline in month-on-month increase of major rents to 0.1%

Note: The housing rent project is calculated as the weighted average of the equivalent rent for owners and the rent for primary residences to derive the month-on-month growth rate.

Data source: Haver, CICC Research Department

Chart: Month-on-month increase in non-housing core services rebounds to 0.4%

Data source: Haver, CICC Research Department

Chart: Used car prices decline but tariff transmission still difficult to say it's over

Data source: Haver, CICC Research Department