The recent announcement of inflation data in the United States has sent shockwaves through global markets once againThe Consumer Price Index (CPI) for August rose by 8.3%, while the core CPI increased by 6.3%, both figures surpassing market expectationsOn the day the data was released, the S&P 500 index experienced a significant drop of 4.3%, leading to a ripple effect that impacted the A-share market in China.

The rise in the August CPI caught analysts off guard, breaking their predictions of a declineThis led to the largest one-day drop in U.S. stock markets since mid-2020. Such an unexpected outcome is likely to have serious implications for the Federal Reserve’s interest rate policies.

In August, the CPI increased by 0.1% month-on-month, while analysts had predicted a decrease of 0.1%. The core inflation rate saw a month-on-month rise of 0.6%, against an expected increase of 0.3%, bringing year-on-year figures close to the 6.5% recorded in MarchWithin this set of data, no clear signs of a decline in inflation are visibleIt is concerning that despite a drop in gasoline prices by 11% and a 5% decline in energy prices, inflation in the U.S. remains stubbornly high.

Food prices increased by 0.6% in AugustThe combination of supply-side pressures and strong demand has kept supermarket prices elevated, eroding consumers' actual purchasing powerPrices for manufactured goods rose by 0.5% month-on-month, showing no improvement despite relief in supply chain issues and falling transportation costs

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In the labor-intensive service sector, prices continue to climb rapidly, with restaurant prices increasing by 0.9%, reaching a peak in this cycleAlthough wage growth has slowed down, it still surpasses rates seen before the pandemicHigh demand has allowed the service sector to pass costs onto consumers.

The surge in “sticky prices” is not a good omen.

The U.SCPI may take 3 to 5 years to return to policy targets.

The most significant highlight from this CPI data is the rise in rental prices, which increased by 0.7% month-on-month, translating to a year-on-year increase of 6%, exceeding figures recorded during the early 2000s housing bubbleRental prices carry a high weight in the CPI and are typically stable, but once they rise, they are difficult to reverseEconomists refer to this phenomenon as “sticky price.” The rise in rents has taken shape, leading to a firm expectation of inflation, indicating that the U.SCPI may not return to the 2% policy target for at least 3 to 5 years.

In fact, the rise in prices in the U.S. can be categorized into three partsThe first part comes from supply-side price inflation due to disrupted supply chains, a challenge that has passed its worst phaseThis situation was a key reason behind the Federal Reserve's previous optimism regarding the decline in inflationThe second part is the significant rise in oil and food pricesWhile oil prices have considerably declined, future trends remain highly uncertain and are outside the influence of monetary policy, leaving the Fed to make educated guesses

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The third part arises from a surge in demandThe end of the pandemic led to an initial wave of demand release, with wage growth fueling further demand, followed by inflation expectations driving a wage-price spiral.

For price increases triggered by demand, there is a capability for monetary policy to exert control, contingent upon how much cost the Federal Reserve is willing to bearCurbing demand is a primary method for central banks to manage economic cyclesInitially, the market anticipated that a rate hike of over 200 basis points would effectively restrain upward price pressure; however, the latest data suggests a contrary diagnosisJerome Powell, along with other Federal Reserve officials, has indicated an unwillingness to spare any effort in controlling inflation, and it now seems that the price they have to pay may be even greater.

It is noteworthy that categories such as rent, education, and healthcare—typically resistant to price hikes—have started to see significant increases, contrasting sharply with declining energy pricesThis is not a promising sign as controlling sticky prices is more complex and time-consuming.

In September, a 75 basis point rate hike is more likely.

The likelihood of a rate cut in 2023 is low.

What does this mean for monetary policy? Recently, Jerome Powell has repeatedly emphasized that rate hikes will no longer be pre-set; instead, they will be dictated by data and the economic landscape

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