Key Viewpoint: As low-cost inventories are gradually depleted, the transmission of rising oil prices to core goods inflation is likely to accelerate significantly. The May inflation data could become the tipping point that reverses market optimism regarding inflation, with June 10th potentially marking an important inflection point for medium-term risk appetite.
Why did the market react mildly to the stronger-than-expected U.S. CPI in April? The U.S. CPI for April exceeded expectations, but the market largely attributed this to the impact of rising energy prices and technical adjustments to housing rent statistics, not anticipating a sustained inflationary uptrend. Both headline and core CPI surpassed market forecasts in April. However, the breakdown shows the main drivers were energy inflation from higher oil prices and a technical impact from statistical adjustments to rent data made during the 2025 U.S. government shutdown. Core goods inflation remained stable month-on-month at 0%, which the market viewed as key evidence that energy inflation had not broadened.
Why do we believe the U.S. CPI for May may reverse market expectations? 1. The lack of price increases in core goods may be largely due to inventory buffers. Because the duration of an oil price shock is unpredictable, downstream sectors typically do not raise prices immediately. Instead, they first deplete low-cost inventories to maintain stable price levels. The latest data shows that the inventory-to-sales ratios for U.S. manufacturers, wholesalers, and retailers have all declined marginally, indicating that the entire industrial chain is continuing to draw down inventories. 2. We may see the full manifestation of inflation transmission as early as May. The buffering effect of inventories has clear time constraints. When low-cost inventories are exhausted, companies will be forced to raise prices. First, in terms of actual inventory levels, the combined inventories of manufacturers, wholesalers, and retailers can currently support about four months of sales. Although the U.S.-Iran conflict escalated in March, oil prices actually bottomed and began rising at the start of the year. This suggests that by April, low-cost inventories across the industrial chain were largely depleted. Second, while the core goods component of CPI remained stable, the core goods component of PPI surged 0.7% month-on-month in April. This indicates that price pressure has already been transmitted to the production side. Historically, the trends of the core goods components in CPI and PPI have largely moved in tandem. After producers raise prices, as low-cost inventories are exhausted, the retail end will also have to follow with price increases. Third, empirical research supports this conclusion. Känzig (2021) quantified the impact of oil supply shocks on U.S. economic data, finding that the impact on core CPI is relatively limited in the first three months, but after three months, the transmission of oil price increases to inflation often begins to accelerate.
Why might risk assets face broad pressure in June? In summary, while the breadth of inflation was still controllable in April, with high inflation mainly concentrated in areas directly related to oil prices such as fuel and transportation, as inventory buffers are gradually consumed, the May inflation data may comprehensively exceed market expectations. The U.S. Labor Department plans to release the May inflation data on June 10th. This date could become a medium-term turning point for market risk appetite. Corresponding to market timing, in the short term, we judge that with the support of high trading volume, the risk of a significant market correction is low. The market is more likely to exhibit a diffusion of themes, with micro-cap stocks potentially showing temporary strength. After June 10th, we judge that U.S. inflation is highly likely to exceed expectations. At that point, the market may begin pricing in tightening expectations, risk appetite could significantly decline, and correspondingly, risk assets may face some adjustment pressure.
Risk Disclosures: 1. The statistical results in this report are based on historical data, which may not be indicative of future performance. 2. Geopolitical uncertainties may significantly impact the conclusions of this report.
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