Key Insight: As low-cost inventories gradually deplete, the transmission of rising oil prices to core goods inflation may accelerate significantly. The May data could become a tipping point that reverses the market's optimistic inflation outlook, potentially making June 10 a crucial inflection point for medium-term risk appetite.
Why did the market react mildly to the stronger-than-expected U.S. CPI in April? Although the U.S. CPI and core CPI for April exceeded market expectations, the market largely attributed this to energy price increases driven by oil and technical adjustments in housing rent statistics due to the potential 2025 government shutdown. It did not anticipate a sustained rise in inflation. The core goods inflation remained flat month-on-month at 0%, which the market viewed as key evidence that energy inflation has not broadened.
Why do we believe the U.S. May CPI could shift market expectations? 1. The lack of price increases in core goods may be largely due to inventory buffers. Since the duration of oil price shocks is unpredictable, downstream sectors typically do not raise prices immediately but instead consume low-cost inventories to maintain stable price levels. Recent data shows that inventory-to-sales ratios for U.S. manufacturers, wholesalers, and retailers have marginally declined, indicating that inventories are being depleted across the supply chain. 2. The full transmission of inflation may become evident as early as May. The buffering effect of inventories is time-constrained. 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 cover about four months of sales. Although the U.S.-Iran conflict erupted in March, oil prices had already bottomed out and begun rising at the start of the year. This suggests that low-cost inventories across the supply chain were largely depleted by April. Second, while the CPI core goods component remained stable, the PPI core goods component surged 0.7% month-on-month in April, indicating that price pressures have already reached the production side. Historically, the CPI and PPI core goods components have moved in tandem. As low-cost inventories run out, retailers will have to follow producers in raising prices. Third, empirical research supports this conclusion. Känzig (2021) quantified the impact of oil supply shocks on U.S. economic data, finding that the effect on core CPI is relatively limited in the first three months but tends to accelerate thereafter.
Why might risk assets face broad pressure in June? Overall, while inflationary breadth remained manageable in April, with high inflation concentrated in fuel, transportation, and other sectors directly linked to oil prices, the gradual depletion of inventory buffers suggests that May inflation data could significantly exceed market expectations. The U.S. Labor Department plans to release the May inflation data on June 10, which may mark a medium-term turning point for market risk appetite. In terms of market dynamics, in the short term, we judge that the market is unlikely to experience a sharp correction, supported by high trading volumes, and may instead see a diffusion of market trends, with micro-cap stocks potentially performing strongly in phases. However, after June 10, we anticipate that U.S. inflation is likely to exceed expectations, prompting the market to begin pricing in tighter monetary policy expectations. This could lead to a significant downward revision in risk appetite, potentially putting adjustment pressure on risk assets.
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