CICC: The rebound of core inflation in the United States may exacerbate internal divisions within the Federal Reserve

CICC released a research report indicating that the core CPI in the U.S. rose by 0.3% month-on-month in July and rebounded to 3.1% year-on-year, not converging towards the 2% target, which may exacerbate internal divisions within the Federal Reserve and affect policy consensus. The overall CPI increased by 0.2% month-on-month and remained at 2.7% year-on-year. The report shows that commodity prices are moderate, service prices have rebounded, inflationary stickiness has increased, and market volatility will intensify

According to the Zhitong Finance APP, CICC has released a research report stating that the core CPI in the U.S. rose by 0.3% month-on-month in July, rebounding from 2.9% to 3.1% year-on-year, which is higher than market expectations; the overall CPI increased by 0.2% month-on-month and remained at 2.7% year-on-year, slightly below expectations. From a breakdown perspective, July's inflation showed characteristics of moderate goods and a rebound in services: tariff costs are still being passed on to the retail end, but some prices have also seen a decline. Some service prices that had previously fallen have turned to increases, adding stickiness to inflation. The previous judgment is maintained that U.S. inflation will enter a phase of structural upward movement. For the Federal Reserve, the core CPI has not converged towards the 2% target but has returned to above 3%, moving further away from the target. This may increase internal disagreements within the Federal Reserve, making it difficult to reach a consensus on policy decisions. The variables in the monetary policy path will significantly increase, and market volatility will intensify.

July's inflation showed characteristics of moderate goods and a rebound in services. In terms of goods, tariff costs are still being passed on to consumers, but some prices have also seen a decline. The core goods price index increased by 0.2% month-on-month, the same growth rate as last month. Among them, furniture and bedding (month-on-month +0.9%), curtains (+1.2%), audio and video equipment (+0.8%), and photography equipment (+2.1%) still maintained a high growth rate, indicating that tariff costs continue to be transmitted. However, some items that had previously seen strong growth weakened month-on-month in July, such as home appliances (-2.2%), men's clothing (-1.3%), over-the-counter drugs (-0.5%), and computers (-2.6%).

Car prices, which had not increased previously, showed signs of rising in July. The month-on-month growth rate of used car prices rebounded to 0.5%, new car prices stopped falling, and the month-on-month growth of motor vehicle parts accelerated to 0.9%. This trend aligns with the risks highlighted by CICC: automobile manufacturers and dealers had previously absorbed the cost shock from tariffs by compressing profits, but considering that tariff policies will become institutionalized and normalized, this absorption space will continue to shrink. Subsequently, as new car models are launched in 2026, car companies may raise prices to pass on costs (《The U.S. Economy Faces "Stagflation-like" Conditions》).

In terms of services, some previously declining prices have turned to increases, adding stickiness to inflation. The core services price index excluding rent (supercore) rose by 0.5% month-on-month, significantly accelerating compared to before. Among them, the most notable sub-item came from the previously continuously declining air ticket prices, which rebounded sharply to a month-on-month increase of 4%. This indicates that the weak travel activities since the beginning of the year may have stabilized, consistent with the statements from airlines like Delta in their second-quarter reports[1]. Additionally, prices for motor vehicle maintenance (+1.2%), motor vehicle repair (+0.8%), medical services (+0.8%), entertainment services (+0.4%), and express delivery services (+2.0%) are also still rising. Overall, the stickiness of service inflation remains.

In other aspects, the growth rates of food (0%) and energy (-1.1%) prices have significantly declined compared to last month, helping to reduce the pressure of the core CPI year-on-year rebound on the overall CPI. The change in rent inflation is minimal, with the main residence rent increasing slightly from 0.2% last month to 0.3%, and the owner's equivalent rent growth rate remaining at 0.3% The path of rent inflation is basically consistent with the trends shown by the leading Zillow data.

Overall, the July CPI data did not change CICC's judgment on the trend of U.S. inflation—inflation will enter a phase of structural upward movement. As the effects of tariff cost pass-through become more evident in the coming months, core goods inflation will face further upward risks; meanwhile, rent and service inflation may be relatively mild but will also exhibit stickiness. In summary, the year-on-year growth rate of core CPI is expected to rise further before the end of the year (refer to the report "The U.S. Economy Faces 'Stagflation'").

For the Federal Reserve, this CPI report did not provide a clear direction. On one hand, the transmission of tariffs to the retail end is not as severe as previously feared, temporarily alleviating market concerns about tariff impacts; on the other hand, the rebound in service inflation, which is not affected by tariffs, will intensify the Fed's worries about inflation stickiness. From a trend perspective, core CPI inflation has not converged towards the 2% target but has instead returned to above 3%, moving further away from the target. In this context, cautious officials within the Federal Reserve may continue to maintain a conservative stance. In other words, the debate over whether to cut interest rates will not be resolved, and differences among officials may persist.

This divergence also means that the variables in the monetary policy path will significantly increase. In an environment where employment momentum weakens and inflation pressures coexist, it may be difficult for the Federal Reserve to reach a consensus on policy direction. Current economic data exhibits characteristics of "sometimes stagnation, sometimes inflation," making it more challenging for the Federal Reserve to provide forward guidance on interest rate cuts. Although the market has fully priced in a rate cut in September and expects three rate cuts by the end of the year, this pricing may underestimate the complexity of the macro situation. Whether the Federal Reserve ultimately chooses to cut rates or remain on hold, it may face internal divisions. For the market, this often means an increase in volatility, and asset prices will be more susceptible to fluctuations influenced by economic data and officials' statements.

Chart 1: U.S. July Core CPI rebounds, higher than market expectations