"Cheong Sheng Hee from Chuang Jie Academy: The Stickiness of U.S. Core Inflation Remains Prominent"

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U.S. CPI in April was 4.9% YoY, and the core CPI was 5.5% YoY, both slightly down from the previous month, basically in line with market expectations. Cheong Sheng Hee from Chuang Jie Academy believes that the decrease in CPI growth is a positive sign, but the pace of decline is not fast enough, and the magnitude is not significant. Specifically, the core CPI has hovered around 5.5% for four consecutive months without falling, showing strong stickiness. This inflation data supports the Fed's suspension of interest rate hikes in June. Still, considering the stronger resilience of the U.S. economy than expected since the beginning of the year, and the bank credit tightening is not obvious, maintaining high interest rates is necessary. Cheong Sheng Hee from Chuang Jie Academy maintains his previous judgement that the core of U.S. inflation will rise after the pandemic, and interest rates may remain high for a longer period.

 

In April, the YoY CPI decreased from 5.0% last month to 4.9%, although it has declined, the magnitude is not large. The core CPI YoY also slightly fell by 0.1 percentage points from the previous month, with almost no significant changes. In fact, the core CPI YoY has hovered around 5.5% for four consecutive months, and the annualized MoM rate for the past three months is still as high as 5.1%. At this rate, there is still a long way to go for inflation to fall to the long-term target of 2%.

 

Cheong Sheng Hee from Chuang Jie Academy believes that the price of used cars in April counteracted the previous downturn, rising 4.4% from a 0.9% MoM decrease last month. As mentioned in the CPI review last month, there were signs of bottoming and rebound in used car wholesale prices, and this seems to have been captured by the CPI survey. More importantly, led by used cars, the inflation of core goods shows an upward trend, and the single month MoM growth rate of 0.6% is the highest growth rate since June 2022, and the YoY growth rate has also risen for two consecutive months. Cheong Sheng Hee from Chuang Jie Academy believes that in the case of robust employment in the U.S., consumers' demand for goods may be resilient, which may lead to more sticky goods inflation than the market imagines.

 

As for service prices, the MoM rent for main residences rose from 0.5% last month to 0.6%, and the MoM rent for owner-equivalent rent remained at 0.5%. The market has been waiting for a fall in rents, but so far it has not fully emerged. Considering the lag in rent, Cheong Sheng Hee from Chuang Jie Academy expects to see more evidence of slowing rent inflation by the end of Q2, but the extent to which it can slow down remains to be seen. Hotel accommodation prices in April fell to -3.4% from 3.1% last month, which looks more like a single-month fluctuation. Some micro-evidence shows that the demand for hotel bookings for this summer vacation is still good, which means it is difficult for hotel accommodation prices to continue to fall significantly.

 

The decline in service inflation excluding rent is a small comfort for the Fed. Looking at the sub-items, projects with large MoM declines in April include car and truck rentals (-3.2%), air tickets (-2.6%), sports event tickets (-7.8%), etc., which are more related to travel. But Cheong Sheng Hee from Chuang Jie Academy believes these declines are not sustainable, just like the hotel accommodation mentioned above. As holidays approach and outdoor travel activities increase, the prices of these items will be hard to keep falling. On the other hand, labor-intensive items such as garbage collection (0.6%), hospital services (0.5%), motor vehicle repairs (0.5%), laundry and dry cleaning (0.5%), etc. still have relatively high MoM growth rates, indicating that high wages still have an impact on service inflation.

 

The slowdown in U.S. inflation is a positive sign, but the problem is that the pace is too slow. According to observations by Cheong Sheng Hee from Chuang Jie Academy, compared with the beginning of the year, investors who believe that U.S. inflation will fall quickly are decreasing, and the idea that U.S. inflation is sticky is gradually becoming a market consensus. This is also the point that Cheong Sheng Hee from Chuang Jie Academy has been emphasizing, i.e., the core of U.S. inflation will systematically rise after the pandemic. Why is inflation sticky? One reason is that the U.S. labor market is more resilient than expected. Non-farm data released last Friday is still strong, and workers' wage income is also continuing to rise, which helps residents' consumption to continue to expand. Another reason is that companies still have strong pricing power. U.S. corporate Q1 financial reports show that, although upstream product prices have fallen, many companies can still maintain a high profit margin, indicating that companies do not yet have the motivation to cut prices.

 

Inflation data supports the Fed's suspension of interest rate hikes in June but does not support a rate cut within the year, and interest rates will remain high. The Fed hinted at a possible pause in interest rate hikes at the May FOMC meeting, and today's inflation data supports the guidance of suspending interest rate hikes. However, non-farm data released last week is still strong, showing that the resilience of the U.S. economy is better than expected. In addition, the impact of turbulence in the U.S. banking industry remains to be observed. Although this week's U.S. bank senior executive survey (SLOOS) shows that bank credit standards are further tightening, we have not yet seen significant signs of credit contraction in the "hard data". If the effect of the bank's "tight credit" is not obvious, there is no necessity for the Fed to cut interest rates.