Since the fourth quarter of 2021, the problem of inflation in the United States has continued to ferment. Fed officials have changed their expression on inflation. Powell finally admitted that the recovery of inflation is not temporary. At the upcoming interest rate meeting in December, the Federal Reserve is expected to accelerate the pace of taper and leave room for early interest rate hikes. Inflation may cause the fed to raise interest rates earlier and faster in 2022. In addition to the impact on monetary policy, our previous report also pointed out that inflation has seriously affected the lives of American people. Since August 2021, the intensification of inflation concerns has dragged down Biden's poll support rate. In the past, it may have an impact on the US mid-term elections.
Under multi indicator observation, the surge of US inflation generally escalated in the fourth quarter of 2021. In our previous report, we introduced four types of indicators reflecting the trend of potential inflation in the United States, Among them, the truncated average PCE (Dallas fed) excluding abnormal fluctuations, the sticky price CPI (Atlanta fed) excluding countercyclical effects, and the median CPI (Cleveland fed), which measures the inflation center, only returned to the pre epidemic level in September and hit a new high since the financial crisis in October.
So, how will the subsequent US inflation be interpreted? According to our prediction, the core CPI may peak in March 2022, reaching nearly 6.1%, and the core PCE may peak in February 2022, reaching nearly 5.7%. We selected CRB commodity index and S & P US house price index as leading indicators, Fit the core commodities (excluding energy and food) and residential services of the core CPI; use the average month on month growth rate in recent 5 years to predict the services other than residential. When will the US inflation peak in 2022? We expect the core commodities (accounting for about 26% of the core CPI index in November 2021, the same below), the year-on-year growth peaked in March 2022, reaching nearly 10.6%, residential services (accounting for about 41%) rose to nearly 5.3% in March 2022, and services other than residential services (accounting for about 32%) reached nearly 4% in January 2022.
From the perspective of sub items, in November 2021, rent and second-hand car prices, the two main drivers of inflation, did not decrease. Restricted by the shortage of chips, the capacity utilization rate of the U.S. motor vehicle and parts manufacturing industry still lags behind the pre epidemic level, resulting in the jump in the price of second-hand cars since September. In terms of rent prices, the year-on-year growth rate has soared from 1.5% in February to 3.9% in November. According to our analysis of historical data, the S & P U.S. House Price Index, as the leading indicator of rent, is about 15 months ahead of rent. We expect to continue to push up U.S. inflation in the first quarter of 2022.
From the perspective of supply-demand mismatch, the demand side has recovered strongly under the U.S. economic recovery, and the supply shortage in some fields may continue until mid-2022. The delivery time of American suppliers peaked in May 2021 and rebounded again in October. In October, the overall capacity utilization rate of the U.S. manufacturing industry has exceeded the pre epidemic level, and the capacity utilization rate of the computer, electronic products and chemical industry has been at a historical peak. In view of the long production cycle and short supply, the prices of relevant products may further increase in the first and second quarters of 2022.
In addition, wage inflation in some industries has been transmitted to product prices. Our previous report pointed out that under the factors such as the distortion of the labor market caused by the epidemic, the structural decline of the labor participation rate, the early retirement of some people approaching the retirement age, and the sharp decline in the number of immigrants, one of the main increments of the U.S. labor force, the tight supply in the job market has not been alleviated. In order to attract and retain employees, enterprises frequently raise salaries. In October 2021, ECI's private sector salary increased by more than 4% year-on-year.
Factors such as the continuation of supply shortage and wage growth breaking 4% have forced the fed to face up to the reality that inflation is not temporary. The minutes of the meeting showed that Fed officials had discussed accelerating taper at the interest rate meeting in November to make room for subsequent interest rate hikes. We expect taper's reduction to double to US $30 billion / month and end at the end of the first quarter of 2022. In terms of interest rate increase, the market forecast can be summarized as "turning slowly but turning quickly". In December 2021, the market forecast that the first interest rate increase will be in October 2022 and five times within one year after the first interest rate increase.
However, if the Federal Reserve announces to speed up the taper at the interest rate meeting in December and ends at the end of the first quarter of 2022, the market's prediction of the time of the first interest rate increase may be too dove. The interest rate increase shown in the dot matrix of the interest rate meeting in December may exceed the market expectation (for example, raising interest rates 2-3 times in 2022), which may cause the risk of asset price fluctuation. As shown in Figure 15, the rhythm of interest rate increase can guide the interest rate of ten-year us bonds. It is necessary to be vigilant against the upward risk of US bond interest rate caused by the hawkish guidance of the Federal Reserve exceeding the market expectation.
Risk tip: covid-19 virus mutation, vaccine failure, large outbreak of confirmed cases, leading to economic blockade
