Morgan Stanley: The story of falling inflation in the U.S. has come to an end, and the market needs to adapt to "higher for longer" interest rates

According to the Zhitong Finance APP, Morgan Stanley firmly believes in its latest U.S. inflation outlook report that the rebound in core CPI is not a flash in the pan, but is forming a sustained upward trajectory. The research team expects that the core CPI will rise by 0.35% month-on-month in August, equivalent to an annual rate of 3.12%, marking the third consecutive month of increase; the overall CPI, driven by the resumption of positive growth in the energy sector after seasonal adjustments and a slight acceleration in food prices, will rise to 0.38% month-on-month, with an annual rate of 2.92%, corresponding to an NSA index of 324.001.

Compared to the previous round of rebound that started in June, the biggest feature of this round of impulse is "goods leading, services pausing," meaning that core goods inflation continues to expand under the dual effects of tariff transmission and manufacturers' repricing, while core services will see a mild pullback this month after some items jumped "ahead" in July.

The report warns that the price increases on the goods side have been fully confirmed by soft indicators: the ISM payment prices index and the Markit manufacturing output prices index in August remain above 60, with the output price index consistently hovering at historical highs outside the pandemic period since June. Historical experience shows that as long as the three-month average of this index is above 60, the month-on-month reading of core goods PCE is likely to show positive growth; if it breaks through 70, the increase often further amplifies.

Models indicate that tariff-related costs have contributed about 20 basis points to core inflation so far this year. If the August data meets expectations, the cumulative contribution will rise to 30 basis points, approaching half of the total shock under the team's assumption that tariff rates remain unchanged. Specifically, clothing excluding footwear still lacks pricing power, new cars have only slightly increased, but prices for "other goods" such as home appliances, electronics, furniture, and used cars have significantly strengthened, enough to expand core goods month-on-month from 0.21% in July to 0.51%.

On the service side, rent inflation continues to operate along a slowly declining path below 0.3%: Owners' Equivalent Rent (OER) and primary residence rent recorded 0.29% and 0.27%, respectively, consistent with the continued weakness indicated by market rent indicators before the fourth quarter; hotel average prices remain lower than in the first quarter, with a slight month-on-month improvement but still negative. Core services (excluding housing) jumped to 0.48% in July due to abnormal increases in healthcare and airline ticket prices, and are expected to fall back to 0.32% in August.

Among them, dental services recorded a record increase of 2.58% in July, and the team believes there is statistical noise, expecting a significant adjustment this month, which will bring overall medical service inflation down from 0.79% to 0.30%; airline ticket prices, while maintaining positive growth, have seen a slowdown in month-on-month momentum from last month's peak; auto insurance is expected to rebound to around 0.5% after two months of weakness. Overall, core services remain sticky, but short-term impulses are showing signs of peaking.

The energy sector has returned to positive growth on a seasonally adjusted basis, and food prices have also slightly rebounded from July's low, but still remain far below the extreme readings of the first quarter. Therefore, although the overall CPI is higher than the core, it has not yet shown signs of comprehensive overheating risk.

Models indicate that if the core CPI in August ultimately lands at 0.35%, the corresponding core PCE month-on-month will reach 0.34%, higher than July's 0.27%, with financial services PCE continuing to grow significantly due to strong returns in U.S. stocks in June and July, while healthcare and airline ticket prices have receded. It is worth mentioning that this month's PPI will be announced one day ahead of the CPI, allowing the market to almost piece together a complete picture of the August PCE, significantly enhancing data transparencyFrom a risk perspective, Morgan Stanley warns that since the forecast value is precisely at the 0.35% "rounding critical point," if the commodity price increase falls slightly short, the unrounded result may drop to 0.30%. Therefore, the unilateral deviation is mathematically more inclined to the downside. However, in terms of trends, as long as the soft indicators continue to hover at high levels, the price increase of commodities will shift from "one-time" to "sustained," and the space for service price retraction is limited, raising the floor for core inflation.

For a market that is eagerly seeking answers to "how much will rates be cut," this report is akin to a splash of cold water: the story of falling inflation has temporarily come to an end in the summer of 2025, and next, investors need to mentally prepare for a "higher for longer" interest rate environment