U.S. Inflation Surges: Core Rate Up!

Has U.Sinflation started to rebound?

On Wednesday evening, the U.SDepartment of Commerce released inflation data that is of significant concern to the Federal Reserve: the core PCE Price Index rose by 2.8% year-on-year in OctoberThis marks a notable increase, indicating that the domestic inflation rate in the United States is showing clear signs of recovery.

Even with an annualized inflation rate of 2.8% over the past three months, it remains above the 2% target previously set by Chairman Jerome Powell, which underscores the ongoing inflation crisis the United States is grappling with.

Beneath the surface of this 2.8% year-on-year inflation rate is a month-on-month increase of 0.36% in October, which represents the largest jump since March of this yearThis suggests that since the Federal Reserve initiated interest rate cuts, inflation in the U.S

has started to pick up momentum again.

Core PCE increased by 0.36% month-on-month

As one of the most critical indicators for the Fed, persistent core inflation pressures could compel the Federal Reserve to reconsider its monetary policy strategyThis could lead to a reduction in the previously anticipated interest rate cuts, ultimately decreasing the liquidity of the U.Sdollar, all measures taken to combat rising inflation.

Adding to the Federal Reserve's headache is the apparent disinterest from certain quarters in tackling these inflation issuesThe prevailing sentiment seems to be one of making America great again, and as long as the manufacturing sector shows signs of revitalization, inflation could be sidelinedPowell finds himself in a challenging position that is difficult to navigate.

In light of the current inflation landscape, it’s possible that the Federal Reserve will scrap its plans for interest rate cuts in December and January of the coming year

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This departure from previously expected cuts could put a serious dent in the proposed monetary easing initiatives.

This scenario holds implications for countries around the globe, as previously anticipated favorable conditions from U.Smonetary policy look likely to evaporateHistorically, whenever the Fed has engaged in aggressive monetary easing, global economies have tended to enjoy a boost.

With the Fed potentially slowing its interest rate hikes due to the inflation situation, this poses unfavourable repercussions not just for the U.S., but also for nations such as China and Southeast Asian countries, including many in Europe that are not short on dollars.

Data from the IMF further illuminate the matter, forecasting that economic growth in 2025 will parallel that of 2024 due to a lack of stimulus from anticipated interest rate cuts

In particular, the growth rate for developing countries is projected to dip from 4.4% to 4.2%, which indicates that life for those nations is expected to become increasingly challenging next year.

IMF Economic Growth Forecast

So how will the Federal Reserve approach its monetary policy moving forward? Simply put, it will be a matter of “take it step by step.”

Given the uncertainty surrounding the current administration, predicting future monetary policies, even in comparison to those under President Biden, is fraught with difficultyHowever, experts have started to project the impact that tariff policies might have on the globe, particularly on China.

The Fed's approach to interest rates is quite methodical

Former head of the National Bureau of Statistics, Qiu Xiaohua, previously predicted that the new U.S

administration might impose tariffs of up to 60% on ChinaHowever, this measure is unlikely to materialize all at onceBased on announcements made regarding an initial 10% tariff increase, the anticipated tariffs could reach as much as 38% by 2025, which may result in a 1% reduction in China’s GDP.

Despite enduring six years of a trade war, China remains one of America's most crucial suppliers of goodsUltimately, the tariffs imposed by the U.Sare borne by American importers and eventually passed on to U.Sconsumers.

In essence, the greater the trade battle intensifies, and the more tariffs accrued, the higher the living costs for American consumers, which in turn drives inflation in the country.

Furthermore, proposals for tariffs on Mexico, Canada, and even a 10%-20% tariff on the European Union could further exacerbate inflation within the U.S.

How significant the impact will be remains uncertain, and Powell himself struggles to predict, which is why last month he stated that the Fed would not set a predetermined path towards interest rate reductions

Rather, it would adapt its strategies according to a flow of economic data.

Now, looking at the current probability of a cut in interest rates, the federal funds rate stands at 4.5%-4.75%. There is a 27.3% chance that rates will remain unchanged in December, with a 72.7% likelihood of a cut.

Federal Reserve Rate Monitoring Tool

However, the likelihood of any rate cuts in January has diminished significantly, with current estimates suggesting a 62.6% chance that rates will not be lowered.

With the U.Shaving taken action, it is clear that the tariff policies pose a negative impact on ChinaThe question remains: how should China respond?

China has positioned itself as a global trading powerhouse, an industrial giant, and even a military strongholdAside from the U.S., there are few countries that can compete

However, one of China’s vulnerabilities lies in the financial realmWhile the U.Swields the might of dollar hegemony, the global influence of the renminbi still lags significantly behind that of the dollar.

The BRICS payment system pilot has officially launched.

Hence, in recent years, China has been striving to bolster its financial sector's influenceInitiatives such as developing the BRICS payment system, research on BRICS currencies, and the promotion of currency swap agreements aim to enhance the international standing of the renminbi.

To foster financial growth, opening up markets is essential; hence, extending trade horizons while gradually integrating the renminbi into every trade venture is crucialEstablishing a robust economic order centered around the renminbi would enable China to effectively counteract U.S