As the Federal Reserve of the United States has adopted a steeper interest rate hike trajectory, there emerges a possibility that American consumer demand could retract more swiftly in 2023. This scenario increases the likelihood of substantial rate cuts in 2024, as the central bank attempts to stabilize an economy responding to both high inflation and the conduits of monetary policy.

On October 14, it was reported that the retail and food service sectors witnessed an 8.2% year-on-year growth in September, albeit a slight decline of 1.2 percentage points from AugustYet, a three-year moving average painted a different picture, as it experienced an increase of 0.2% to reach 9.7%, aligning with levels not seen since February 2022 and sitting 5.7 percentage points above the mean established in 2019.

Since the Fed instigated rate hikes in March, aggressive monetary tightening has seen the cumulative increase reach 300 basis points, placing the target range between 3% and 3.25% by September

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However, retail data indicate that these swift interest increases have not mitigated the excess purchasing power stemming from considerable fiscal stimulus received during the pandemic, which continues to engender overheated consumer demand for goods.

Large one-time fiscal disbursements often convert into increased savings among residentsOn one hand, such financial relief has elevated expectations concerning future wage growth; on the other, it fosters prolonged periods of robust consumer demand, particularly amidst an ongoing pandemicThus, the patterns of consumer behavior suggest that the surge in goods consumption may persist longer than prior trends indicated.

Additionally, the U.SConsumer Price Index (CPI) reflected a year-on-year increase of 8.2% in September, mirroring the previous month's figures, maintaining an elevated status

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This steady inflation is largely attributed to significant price increases in categories like housing and essential services, which together constitute a substantial part of the overall CPIThe rent and core service personal expenditures inflated by 0.8%, which contributed to a jump of 0.4 percentage points in the core CPI, lifting non-food and energy related costs to an astonishing high of 6.7%—the steepest observed since September 1982.

Given global oil supply contractions and the potential for continued rent increases for another year, the inflation landscape for the U.Sappears grim for 2023. Although third-quarter projections had previously overstepped expectations regarding global oil supply, this trend recently shifted direction as OPEC announced a cut of two million barrels per day, positioning oil prices to stay elevated as we move into the first half of the following year.

The patterns revealed in historical data suggest that the Fed's increased rate of interest hikes has only recently started having a tangible impact on slowing down the upward trajectory of housing prices

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Traditionally, rental price fluctuations lag behind residential pricing by about five quartersConsequently, until the third quarter of 2023, the housing component of the CPI may continue to exhibit significant year-on-year increases, implying that inflationary pressures in the core areas of the economy could recede more slowly than previously anticipated, prolonging the current inflationary trend.

Moreover, aside from the pivotal factors of oil and rent, American households still retain an extraordinary level of savings—far exceeding typical thresholdsThis excess liquidity could contribute to an extended period of elevated consumer demand for goods, further entrenching high inflation levels for the foreseeable future.

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inflation and retail suggests a deeper understanding of the short-term inflationary risks highlighted in the minutes of the Federal Reserve's September FOMC meetingThese risks include the ongoing tightness in the labor market, escalating energy prices, supply chain disruptions, and the resilience of service prices, particularly rentsThe Fed’s current emphasis on newer economic data over more subjective forecasts suggests an increasing likelihood of aggressive interest hikes—potentially 75 basis points in November and 50 basis points by December—especially given the current structural dynamics in supply and demand.

However, as the Fed continues to implement a steeper hike trajectory, it may inadvertently accelerate the retraction of consumer demand in 2023. Such a scenario could further dampen housing prices, leading to a pronounced decline in rental prices post-2023 Q4, elevating the potential for substantial rate cuts in 2024.

In a broader context, as developed economies globally collectively tighten their monetary policies, the underlying supply and demand dynamics within the U.S

economy appear relatively stableContrastingly, European and British markets are currently grappling with energy crises that have significantly hampered supply chains, suggesting that the U.Sdollar index may remain high amidst these challenges, with potential for further strengthening.

For China, the strengthening of the dollar can indeed exert substantial pressure on the renminbi-to-dollar exchange rateNevertheless, due to limited capital account openness and the restrained borrowing of foreign debt by enterprises during the pandemic, alongside proactive upgrades in manufacturing supply chains, the spillover effects from the Fed’s unprecedented policy tightening on China's monetary policy should remain minimalThus, the effective exchange rate of the renminbi is likely to sustain near historical highs, with projections suggesting it will fluctuate around the 7 to 7.1 range against the dollar through the end of the year.