Analysis of August US CPI Data: Inflation Resists Retreat, and the Fed May Raise Interest Rates Again?
Hello everyone, I'm your financial observer. Recently, the US stock market and global markets have been closely watching one number: the August US Consumer Price Index (CPI).
Simply put, this data is like a “thermometer for prices” in the United States. If the thermometer reading is high, it means things are getting more expensive and money is losing its value; if the reading is low, it means prices are stable.
The latest data has poured cold water on the market: the CPI rose by 0.4% month-on-month, and the core CPI even exceeded expectations. Coupled with the persistently high oil prices, people are worried that inflation isn’t going away as easily as expected, and the Federal Reserve (the US central bank) may soon start raising interest rates again.
Don’t worry. Let’s break down this news and explain in plain language what’s going on and what impact it will have on your wallet.
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1. What does “0.4% month-on-month” mean, and why isn’t it considered low?
First, let’s understand two terms: CPI and month-on-month.
- CPI: Think of it as the amount of money you spend on a fixed basket of goods (like milk, bread, gasoline, haircuts) at the supermarket. If the price of this basket goes up, the CPI goes up.
- Month-on-month: This compares the current month with the previous month.
The news says that the CPI rose by 0.4% month-on-month in August, meaning the cost of that basket of goods was 0.4% higher in August than in July.
Why isn’t 0.4% considered low?
In economics, an “ideal” rate of inflation is around 0.2% per month, as this indicates a moderate increase over the long term.
- At a rate of 0.2% per month, the annual inflation would be about 2.4%, which is in line with the Fed’s 2% inflation target.
- With a rate of 0.4% per month, the annual inflation would be around 4.8%.
This is like your salary only increasing by 2% a year, but prices increasing by 4.8% a year. Your purchasing power is actually declining. So, a rate of 0.4% is still too high for the US economy, which needs more “medication” to bring inflation under control.
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2. What is “core CPI,” and why does it worry the Fed more than the overall CPI?
The news mentions that the core CPI exceeded expectations, and this is the key point.
Core CPI is the CPI after excluding “food” and “energy.”
Why are these two categories excluded?
- Energy (mainly oil prices): Oil prices are highly volatile and affected by international situations and weather, so they don’t accurately reflect the long-term trends of the domestic economy.
- Food: Prices of food are affected by seasons and climate and are also unstable.
Core CPI reflects “underlying inflation,” which is the trend of prices for everything else (like rent, wages, services, electronics, etc.) except for oil and food.
Why is it bad when core CPI exceeds expectations?
If the overall CPI is high because of high oil prices, the Fed might think, “Oh, that’s due to external factors; it’ll get better when oil prices drop.”
But if core CPI exceeds expectations, it means that prices are rising in other areas as well, and the rise is faster than expected. This indicates that inflation has become “structural,” meaning it’s embedded in the economy. For example, due to a shortage of workers, restaurant employees’ wages are rising, making meals more expensive; or because of high demand for housing, rent is increasing. This type of inflation is harder to control because it’s tied to people’s income expectations and consumption habits.
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3. How do high oil prices contribute to the inflation problem?
The news mentions that high oil prices are adding to the situation, like pouring more gasoline on a fire.
Although we exclude energy when calculating core CPI, high oil prices have a wide-ranging impact on the economy:
1. Directly increase living costs: More expensive gasoline means higher costs for commuting and shopping.
2. Increase transportation costs: Truck drivers’ fuel costs rise, which in turn raises the prices of the goods you buy.
3. Affect inflation expectations: When people see high oil prices, they expect prices to continue to rise in the future, leading to more spending or demands for higher wages, which further drives up prices.
So, high oil prices not only make the CPI numbers look worse but also indirectly raise core CPI through the supply chain and psychological expectations, creating a vicious cycle:
High oil prices → Higher transportation costs → Rising prices of goods → Rising inflation expectations → The Fed having to raise interest rates more aggressively.
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4. “Interest rates are on the line”: Why is the Fed hesitant to back down?
The Fed is facing a dilemma:
- On one hand, there are signs of economic slowdown, and the job market is starting to weaken. Raising interest rates too sharply could cause the economy to shrink and trigger a recession.
- On the other hand, inflation (especially core inflation) is still high. If the Fed stops raising rates or lowers them now, inflation could rebound and become “severe,” with even more serious consequences.
“The phrase ‘interest rates are on the line’ means the Fed is ready to act at any moment.”
Why?
Because once inflation expectations get out of control, it’s like a runaway horse. If people and investors think money will continue to lose value, they will buy assets frantically and demand higher wages, leading to a spiral of rising prices.
The Fed’s ultimate goal is to control inflation expectations. To achieve this, they need to keep interest rates high enough to make borrowing more expensive, thereby cooling down consumption and investment and bringing prices under control.
The current signal is that the Fed is willing to take some risk of an economic slowdown to ensure inflation is completely contained. So, even if economic data is weak, as long as inflation numbers don’t meet targets, the door to raising rates won’t close, and it might even continue for longer and at higher levels.
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5. What does this mean for ordinary people (from a global perspective)?
You might ask, “I’m Chinese; what does it matter if the US raises interest rates?”
It matters a lot! The global economy is interconnected, and the US is the “financial heart” of the world, and its economic trends directly affect the global economy:
1. Strengthening the dollar and putting pressure on the RMB: When the US raises interest rates, dollar deposit interest rates increase, attracting global funds to the US, making the dollar stronger and other currencies (including the RMB) weaker.
- Impact on you: If you plan to travel or study abroad, converting money to dollars will cost more. If you hold dollar assets, their value might increase, but if you have a dollar loan, the repayment pressure will increase.
2. Global stock market volatility: Higher interest rates mean higher “risk-free returns” (e.g., higher interest on US Treasury bonds), so funds may flow out of riskier stock markets (like the A-share and Hong Kong stock markets), causing them to fluctuate or decline.
3. Commodity price volatility: A stronger dollar usually causes commodity prices (like gold, oil, copper) to fall.
- Impact on you: If you hold gold, you might experience short-term price adjustments, but in the long run, gold remains an attractive asset in times of inflation.
4. Opportunities and challenges for export companies: A weaker RMB is beneficial for Chinese export companies because their products become cheaper in international markets, but it increases import costs (e.g., for oil and chips).
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Summary
The August US CPI data shows that the process of bringing inflation under control is more difficult than expected:
- The overall CPI rose by 0.4% month-on-month, indicating ongoing price increases.
- Core CPI exceeded expectations, indicating that inflation has become embedded in everyday consumption and services.
- High oil prices are exacerbating the problem by driving up transportation costs and inflation expectations.
- The Fed’s approach is to prioritize controlling inflation, which may mean continuing to raise interest rates for a longer period.
Advice for ordinary people:
1. Monitor exchange rates: Plan ahead if you have large dollar expenses.
2. Be cautious with investments: Global stock markets may be more volatile, so don’t rush into investments.
3. Understand the macroeconomy: This is a global issue; the economy is undergoing a transition, so be patient.
Remember, inflation is a chronic problem, and raising interest rates is a drastic solution. The “drastic measure” hasn’t stopped yet, and the economy is still struggling. Our task is to understand the trends and adjust our strategies to avoid being affected.