Source: Zhongjin Dotting
The agency believes that the inflation data this time mainly depends on the month-on-month growth rate, but it backfired and the final reading was 0.6%, which was the highest month-on-month growth rate in the past three months. It is predicted that the Fed may still raise interest rates by 50 basis points in June, but for the pace of interest rate hikes in July and beyond, the Fed needs to reassess based on the latest situation.
First, affected by the high base effect, the CPI and core CPI in April fell year-on-year, but the decline was not as large as expected. From a month-on-month perspective, the core CPI increased by 0.6% in April, indicating that inflation momentum is still strong. Due to the high base in the same period last year, before the data was released, the market generally expected that the year-on-year growth rate of CPI and core CPI in April would fall, so the inflation data this time mainly depends on the month-on-month growth rate. The market had expected the core CPI to increase by 0.3% month-on-month, but it backfired, and the final reading was 0.6%, which was the highest month-on-month growth rate in the past three months. That is to say, the price increase momentum has not slowed down, but has strengthened.
From the perspective of sub-items, the prices of travel-related products have increased more, such as air tickets, new cars, hotels, etc. Second-hand car prices also fell less than expected. The most conspicuous of the inflation data in April was the price of air tickets, which increased by 18.6% month-on-month, which is also the highest month-on-month growth rate since 1963. This shows that consumers’ demand for outbound travel has increased significantly.
The prices of other travel-related services are also on the rise. The month-on-month growth rate of out-of-home catering has increased from 0.3% in the previous month to 0.6%, and the month-on-month growth of hotels and hotels has increased by 2%. The month-on-month growth rate of new cars increased from 0.2% in the previous month to 1.1%. Although used cars fell by 0.4% month-on-month, the decline narrowed from the previous month. These data show that consumer demand in the United States is still very strong, and with the arrival of summer, these needs will be further released with the increase in outdoor activities.
Rental prices are showing signs of accelerating. The weight of rent in the US CPI basket is as high as 32%. The two most important items are the owners’ equivalent rent and the rent of primary residence. The former is the owner’s own residence. The rent of the house converted according to the relationship between the rent of the surrounding houses and the house price accounts for about 24% of the CPI basket; the latter is the real house rent paid by the tenants, accounting for about 7%.
From the data in April, the month-on-month growth rate of landlords’ equivalent rent increased from 0.4% in the previous month to 0.5%, and the month-on-month growth rate of main residence rents increased from 0.4% in the previous month to 0.6%, both of which showed an accelerated upward trend.
We have pointed out that CPI rent inflation lags behind house prices and market real-time rental prices, which may mean that rent inflation will remain high this year due to the sharp rise in U.S. house prices last year. In addition, according to a survey by the Federal Reserve Bank of New York, in April, consumers’ expectations for the growth rate of rent prices in the coming year remained at a high level, and consumers’ medium-term (3-year) inflation expectations also showed a rebounding trend.
Food prices were resilient, and energy prices fell due to falling oil prices. In April, food products increased by 0.9% month-on-month, a slight drop from 1% in the previous month, but still maintained a high level. In terms of items, the price growth rate of dairy products (2.5%, the same month-on-month), non-alcoholic beverages (2%), meat, poultry, fish eggs (1.4%), cereals and bakery products (1.1% month-on-month) was higher.
After the Russia-Ukraine incident, global grain and fertilizer prices have risen, and the impact on food supply and prices is gradually emerging. We expect food inflation to remain high in the future. In terms of energy, affected by the drop in oil prices, energy commodity prices fell by 5.4% month-on-month in April, of which gasoline prices fell by -6.1%. As the situation in Russia and Ukraine has not eased, energy prices have greater uncertainty.
According to data from the American Automobile Association, the price of gasoline in the United States has reached a new high since May, reaching $4.4 per gallon, which means that energy prices may rebound in May.
The higher-than-expected inflation has damaged the Fed’s credibility again and may prompt it to reassess inflation trends. After the Fed’s interest rate meeting last week, Powell told the market that the Fed was not actively considering raising interest rates by 75 basis points, in order to dispel market concerns about raising interest rates. U.S. stocks rose sharply that day, but fell sharply the next day. One explanation is that the market believes that Powell’s remarks lack credibility. He hastily ruled out a 75 basis point rate hike without proving that the inflation risk has been lifted, which is hard to convince.
With the release of CPI data in April, the market’s concerns were confirmed, and US inflation did not fall back soon. Although we do not think the Fed needs to raise interest rates by 75 basis points immediately, rushing out of this option will damage the credibility of the Fed, and Fed officials need to reflect on this. Looking ahead, we believe the Fed may still raise rates by 50 basis points in June, but the pace of rate hikes in July and beyond will need to be reassessed based on the latest situation.
The inflation risk has not been eliminated, and the “bear market rebound” of US stocks and US bonds also needs more reasons. Before the release of inflation data, investors generally expected a relatively low inflation data, which would lead to a rebound in U.S. stocks and a fall in U.S. bond interest rates. But yesterday’s data seems to have disappointed the market a bit. In the short term, we believe that although the April inflation data may not lead to another sharp sell-off in U.S. stocks and U.S. bonds, more reasons may be needed to achieve a hearty “bear market rally”.
Editor/Corrine
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