U.S. CPI: A Pill of Assurance Before Interest Rate Cuts

Event

The U.S. inflation in August roughly met expectations, with the overall CPI rising 0.4% month-on-month (higher than the expected 0.3% and previous value of 0.2%), and the overall CPI increasing 2.9% year-on-year (previous value 2.7%). The month-on-month and year-on-year growth rates of the core CPI remained stable at 0.3% and 3.1%, respectively.

The U.S. inflation situation has not worsened, with prices of import-sensitive goods and core service inflation remaining relatively stable.

Food prices and energy prices rose 0.5% and 0.7% month-on-month, both higher than previous values. The month-on-month increase in core goods rose from the previous value of 0.2% to 0.3%, mainly driven by new and used car prices rising 0.3% and 1.0% month-on-month, respectively. The "CPI with high import content" we constructed slightly decreased by 0.03% month-on-month in August (increased by 0.07% after 3MMA processing), indicating that tariffs have not yet caused a deterioration in U.S. inflation and also suggesting that U.S. companies are currently the main bearers of tariff price impacts. Service inflation remains stable, with the year-on-year growth rate of residential CPI slowing from the previous value of 3.7% to 3.6%. The month-on-month increase in core service items, excluding housing, narrowed from the previous value of 0.55% to 0.22%, both indicating a relatively healthy state. We expect the U.S. PCE deflator index to rise 0.26% month-on-month in August, with core rising 0.22%, overall increasing 2.7% year-on-year, and core increasing 2.9% year-on-year.

The judicial controversy over the legality of the White House's tariff measures remains unresolved, which may be one reason for companies to delay price increases.

We believe the Supreme Court is unlikely to fully endorse the White House's approach of imposing tariffs under the International Emergency Economic Powers Act (IEEPA). Companies may delay price adjustments to reduce "menu costs" before the final ruling is announced. Of course, the White House can subsequently achieve a similar effect to replace existing measures through Section 301 of the Trade Act of 1974, Section 232 of the Trade Expansion Act of 1962, or Section 338 of the Tariff Act of 1930. Considering companies' willingness and ability to pass on costs, once the "dust settles," more companies are expected to gradually join the ranks of price increases. Most regional Federal Reserves also reported in their September Beige Book that companies expect prices to continue rising in the coming months. The rise in rental vacancy rates and the slowdown in labor demand still give us confidence in the outlook for U.S. service inflation. We continue to believe that there is further room for the year-on-year residential CPI to decline, and super core inflation is unlikely to rise significantly. Overall, we expect the U.S. overall CPI year-on-year to hover around 3% in the coming months.

We still expect the Federal Reserve to cut interest rates three times this year, and the interest rate cut trade is a relatively clear main line.

This CPI report serves as a reassurance before the Federal Reserve resumes its interest rate cuts. We maintain our forecast that the Federal Reserve will cut rates three times this year, each by 25bps. "Risk management-style rate cuts" can both ease dollar liquidity and help maintain global market risk appetite, making it a rate cut model that benefits risk assets like U.S. stocks. Given that U.S. inflation expectations are already relatively stable and the real economy can still receive support from relatively loose fiscal policies during the rate cut cycle, this mild inflation reading seems insufficient to cause the ten-year U.S. Treasury yield to continue to decline significantly after falling below 4% Currently, the allocation value of U.S. stocks may be better than U.S. bonds.

Authors of this article: Wei Xincheng, Cui Rong, Li Chong, Jia Tianchu, Source: CITIC Securities Research, Original Title: "Overseas Research | U.S. CPI: A Pillar of Confidence Before Rate Cuts (August 2025)"

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