Are interest rate cut expectations too optimistic? America's "sticky inflation" is accelerating again

JPMorgan Chase warns that U.S. inflation is showing a more stubborn trend than expected, with multiple alternative inflation indicators indicating that the disinflation process has stalled, and the sticky part of core inflation is accelerating again. This trend may limit the Federal Reserve's room for further aggressive rate cuts.

Currently, the market's interpretation of the July CPI report is relatively optimistic, but JPMorgan Chase states that multiple underlying inflation indicators, including trimmed mean and median inflation, show that inflation has not continued to decline, and the sticky components of core inflation are accelerating again, and a significant portion of its strength is unrelated to tariffs. This means that inflation may remain sticky at levels above the Federal Reserve's target.

Analyst Michael Hanson warns that while the Federal Open Market Committee (FOMC) is currently focused on managing the downside risks in the labor market, the degree to which inflation deviates from its target is significantly greater. Unless the economy falls into recession, the persistent strength of inflation will not support the Federal Reserve in adopting more aggressive easing policies.

Alternative Inflation Indicators Raise Warning Signals

The Federal Reserve's concerns about potentially sustained inflation above its target do not seem unfounded.

According to statistics from the Atlanta Fed, within the traditional core CPI components (sticky + flexible), the sticky components continue to be slightly above pre-pandemic average levels and have accelerated recently.

Basic data shows that while the volatile flexible components soared earlier this year and have returned to negative territory on a three-month annualized basis, the sticky components have accelerated again in recent months.

Historically, sticky components are often dominated by the service sector, and this level of strength is an additional factor beyond the pressure from tariffed goods.

JPMorgan Chase believes that the trimmed mean and median inflation indicators from the Cleveland Fed provide investors with a more reliable assessment of inflation trends than traditional exclusion methods.

Latest data shows that the trimmed mean inflation averaged 2.1% before the pandemic and has rebounded from a low of 3.0% in April to 3.2% in July. The performance of median inflation is even more concerning, jumping from an average of 2.6% before the pandemic to the current 3.6%.

These indicators algorithmically exclude extreme values from each CPI release, focusing on the middle portion of the price change distribution. The trimmed mean excludes the highest and lowest 8% of price changes, while the median represents the precise midpoint of price changes across the CPI.

In terms of three-month annualized growth rates, the trimmed mean has remained flat, while the median has actually eased in recent months. However, both series are still running at over 3%, which is high relative to historical levels and the Federal Reserve's 2% inflation target. As the transmission effects of tariffs become more widespread, this trend may rise again.

Challenges Facing the Outlook for Monetary Policy

Analysts believe that the current inflation pattern presents complex challenges for the Federal Reserve's monetary policy decisions.

Multiple alternative core indicators suggest that inflation remains well above the Federal Reserve's 2% target and may continue to rise. The resilience of inflation in the non-tariff sector is particularly noteworthy, as it indicates that inflation may persist at disturbingly high levels.

JP Morgan's analysis suggests that unless an economic recession occurs, inflation may remain sticky at levels that do not support more aggressive easing policies from the Federal Reserve.

This assessment casts a shadow over the current market expectations for rapid interest rate cuts by the Federal Reserve, and investors may need to reassess the timeline and magnitude of monetary policy normalization