CICC has released a research report forecasting the upcoming US May CPI data, scheduled for release this Wednesday at 8:30 PM.
The firm's model calculations indicate that both the headline and core CPI for May will show a pattern of "sequential decline but year-on-year increase." The core CPI month-on-month figure is slightly below the consensus expectation, while other metrics are largely in line with market expectations.
For headline CPI: May is projected at 0.54% month-on-month (consensus: 0.5%, prior: 0.64%); the year-on-year rate is forecast at 4.24% (consensus: 4.2%, prior: 3.81%). For core CPI: May is projected at 0.23% month-on-month (consensus: 0.3%, prior: 0.38%); the year-on-year rate is forecast at 2.85% (consensus: 2.9%, prior: 2.75%).
CICC's primary analysis highlights two main influencing factors for this inflation data.
Firstly, high oil prices: Continued volatility in the Iran situation in May pushed the average Brent crude oil price further up to $103.7 per barrel (compared to an April average of $102.5). The average retail gasoline spot price also rose to $4.61 per gallon (vs. $4.26 in April). Consequently, the energy component is predicted to have risen by a significant 6.3% month-on-month in May, while transportation services are also estimated to have increased by 0.5% due to rising jet fuel costs.
Secondly, a decline in housing costs: Due to statistical disruptions related to last year's government shutdown, the primary rent and owners' equivalent rent components saw elevated month-on-month increases of 0.55% and 0.53% respectively in April, roughly double the normal rate. Starting in May, these methodological disturbances have subsided, with the primary rent and owners' equivalent rent month-on-month changes expected to fall back to 0.21% and 0.24%, returning to average levels.
The core CPI month-on-month change has now fallen to a normal level, but the headline CPI month-on-month remains elevated, indicating the primary issue is still oil prices.
However, a "positive note" is that tariffs began pushing up prices from May last year. This means that starting from May this year, the higher base effect will gradually exert downward pressure on the year-on-year inflation rate, promoting its decline.
The primary reason for the year-on-year CPI exceeding 4% this time is the rapid month-on-month increase in energy (especially gasoline) prices, which offset the suppressing effect of the base effect on the year-on-year figure.
Therefore, going forward, as long as the month-on-month increase in oil prices slows further, the high base effect is expected to drive the year-on-year CPI lower.
Under the base case scenario, CICC predicts the peak in inflation may occur in May-June, unless oil prices spiral out of control.
What does this imply for the Federal Reserve? CICC's calculations suggest that if the average crude oil price in the second half of the year does not fall below $100 per barrel, interest rate cuts would be unlikely. If oil prices return to the $80-$90 range, it could drive CPI below 3%, keeping the possibility of rate cuts alive. However, pressure for rate hikes would only emerge if prices exceed and remain above $120, corresponding to a year-on-year CPI exceeding 4.5%, a relatively high threshold.
Following last week's stronger-than-expected non-farm payrolls data, markets have begun pricing in expectations for a rate hike by December 2026. Based on the above analysis, this view may be overly pessimistic. While an early rate cut by the Fed is difficult, it can likely manage to look past a temporary inflation spike and refrain from hiking rates in the short term, unless the situation in Iran deteriorates significantly and uncontrollably, keeping oil prices persistently high.
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