The high-profile US inflation data for January 2022 again exceeded expectations, with year-on-year CPI growth of 7.5 per cent (expected 7.3 per cent), core CPI growth of 6.0 per cent year-on-year (expected 5.9 per cent) and month-on-month growth of 0.6 per cent (0.4 per cent). After the release of the data, interest rates on 10-year Treasuries jumped 7bps to above 2%, and the dollar soared 20bps.

The importance of the January inflation data lies in its impact on the way the Fed starts the tightening cycle. After the strong non-farm data, the market focused on the possibility of raising interest rates by 50bps at the March meeting, although the inflation data again exceeded expectations, we still believe that there is little chance of raising interest rates by 50bps.

What is the direction of the inflation data for the Fed to raise interest rates in March?The consensus forecast for core CPI month-on-month growth in January was 0.4 per cent. The CME data showed that the probability of raising interest rates in March was nearly 35 per cent, which jumped to nearly 55 per cent after the release of the inflation data. The real core CPI growth rate in January is less than 0.6% (our expectations for January), and at this point we don't expect the Fed to raise interest rates by 50bps in March.

What is the change in the structure of inflation?The month-on-month growth rate of US rents rose to 0.5% in January, while the month-on-month growth rate of used cars slowed to 1.5%.

The month-on-month growth rate of used car prices in January is the same as that in December 2021, and the chip shortage is gradually alleviating, but the impact is not significant (figure 1). In terms of housing rents, year-on-year growth has soared from less than 2% in February 2021 to 3.8% in January (figure 2). According to our analysis of historical data, the S & P American house price index, as a leading indicator of rent, is about 15 months ahead of rent. the index peaked in August 2021, and we expect rent growth to fall in early 2023.

In addition, we would like to remind youThe actual inflation figures are likely to be stronger than the official figures because this time they are disturbed by the adjustment of sub-weights.On February 8th the Labor Department introduced updated seasonal factors, reducing the share of items such as energy, food and housing rents, and raising the weight of used cars.

How is the wage-inflation spiral?

The embryonic form has emerged, and nominal wage growth in all industries has generally exceeded 4%.From an industry-wide perspective, the US employment cost index ECI has maintained year-on-year growth of more than 4 per cent since September 2021; sub-sectors, the average hourly wage has risen sharply since the fourth quarter of 2021, with the leisure and hotel industry leading the rise in the past two months (December 2021 and January 2022) with an average year-on-year growth rate of more than 13 per cent (figure 3-figure 4).

Real wages have not increased, there is still room for corporate pay increases, and the wage inflation spiral is likely to intensify in the future.The tightest labour market in decades has boosted workers' bargaining power, and American companies have generally raised wages to attract and retain employees (figure 5-figure 6). But nominal wage growth still lags behind inflation, leaving little real wage growth, which means there is still room for corporate pay increases (figure 7).

What is the status of supply bottlenecks?The hardest part may be over.The New York Fed's global supply chain stress index showed signs of peaking at the end of 2021, and delivery times for US suppliers also showed a downward trend (figure 8). The pressure on shipping began to ease at the end of the third quarter of 2021, and shipping prices continued to fall (figure 9). In addition, the epidemic rebound caused by O'Micron has peaked, which is good for the continuous repair of the follow-up supply chain.

What are the implications of the subsequent interpretation of inflation for the Fed's new cycle of raising interest rates?We expect the core CPI of the United States to peak by the end of the first quarter of 2022.(slightly later than we had expected) and is expected to fall below 4% by the end of the year (figure 10). The Fed attaches importance to the economic data released before the interest rate meeting, and the February CPI data will be released a week at the March meeting, which is self-evident. We believe that only if inflation surpasses expectations for two months in a row can the Fed raise interest rates for the first time in March to 50bps.

How will asset prices be interpreted?

Since the beginning of 2022, the rise in interest rates on 10-year Treasuries has been mainly driven by real yields (figure 11). On February 4th, after higher-than-expected non-farm data in January, interest rates on 10-year US Treasuries surged 10bps to above 1.9 per cent. AndInflation grew faster than expected in January, with real interest rates rising, pushing interest rates on US bonds above 2%.Interest rates on two-year Treasuries jumped beyond 10bps after the January inflation data, and 10Y-2Y spreads are likely to narrow further amid rising expectations of an accelerated rate rise, raising sentiment to level the yield curve.

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