U.S. CPI
Column: Looking at the process of disinflation in the United States from the distribution of CPI growth rate. According to the statistics of the growth rate of the 61 sub-items of the fourth level of the US CPI, the risk of runaway inflation in the United States has dropped significantly, but the proportion of high-growth sub-items is still high, and the inflationary pressure is comparable to that of the period from 1990 to the subprime mortgage crisis, and significantly higher than the previous tightening cycle. It is difficult to assert that inflation will return to the 2% medium-term target in the short term from the current inflation distribution, and the interest rate pivot is likely to remain high.
Judging from the April CPI data, the cooling of inflation is mainly due to the deflation of core goods, the inflation stickiness of the core service industry is still strong, and the energy is temporarily out of deflation year-on-year. The 0.3% month-on-month growth rate of CPI and core CPI is still high, and if this growth rate is maintained, there will be significant reflation in the second half of the year.
Looking ahead, we believe that it is difficult to be optimistic about the further substantial progress of US disinflation based on the monthly data alone, and maintain the judgment that the Fed will cut interest rates by 0-50bp in 2024, that is, there is a possibility of no rate cut. At present, the U.S. economy is in a downward cycle, and the U.S. dollar interest rate exchange rate is expected to continue to pull back after the CPI announcement, and the downward mini-cycle is expected to end in June.
Special Column: The U.S. Deflation Process from the Distribution of CPI Growth The San Francisco Fed has conducted distribution statistics on the growth rate of each sub-item of PCE[1] to assess inflation more comprehensively. We refer to its statistical method and make similar statistics on the growth rate of each sub-item of CPI. We use the fourth sub-item of the US CPI price index (non-seasonally adjusted) to calculate the year-on-year comparison, and the fourth sub-item currently contains a total of 61 price sub-items. In order to reduce the impact of monthly data fluctuations, refer to the same method as the San Francisco Fed and take a three-month moving average of CPI year-on-year. The items in the statistics mainly include: the proportion of year-on-year acceleration (deceleration) and the proportion of different growth thresholds. In terms of the proportion of year-on-year acceleration and deceleration: the proportion of year-on-year acceleration will decrease significantly in 2023, but it has rebounded significantly since the beginning of this year, and has rebounded to about 50% by April. Further statistics were collected on the proportion of sub-items whose difference between the current month and the mean of the past 12 months was greater than or less than two standard deviations in the past five years. The two standard deviations correspond to a historical 95% confidence interval, beyond which the movement can be seen as the proportion of inflation de-anchored sub-items. From this point of view, the proportion of sub-items that have de-anchored the year-on-year growth rate will drop sharply in 2023, and the proportion has now returned to the level of the period of stable inflation and remained stable. In order to facilitate the relationship between the month-on-month growth rate and the year-on-year growth rate, we divide the year-on-year growth rate of CPI into three threshold ranges: greater than 3.66%, 1.81%~3.04%, and less than 1.21%, corresponding to the month-on-month growth rate of 0.3%, 0.15%~0.25%, and 0.1% respectively. The three intervals correspond to increased inflationary pressure, controlled inflation, and increased deflationary pressure. From the perspective of historical data: (1) The proportion of sub-items with a year-on-year growth rate of more than 3.66% (0.3% month-on-month) has a very high positive correlation with the absolute level of the federal funds rate. At present, the proportion of high-growth sub-items has fallen back to the level from 1990 to the subprime mortgage crisis, which is still significantly higher than the proportion of the previous tightening cycle. If the proportion cannot fall further, it means that the interest rate pivot will continue to remain high without a recession. (2) The proportion of the controlled sub-item of the year-on-year growth rate of 1.81% to 3.04% (0.15%~0.25% month-on-month) has a certain correlation with the Fed's pause in interest rate hikes and shift to interest rate cuts, which is usually close to 25% when the Fed turns to interest rate cuts since 1990, and close to 20% before the subprime mortgage crisis. The current share is close to that before the subprime mortgage crisis. (3) Since 1990, before the Fed cut interest rates, the proportion of sub-items with a year-on-year growth rate of less than 1.21% (0.1% month-on-month) has usually exceeded 50%, and it is currently less than 50%, but it is comparable to the level before the rate cut in 1998. In summary, the risk of runaway inflation in the United States has decreased significantly, but the proportion of high-growth sub-items is still high, and the inflationary pressure is comparable to that of the period from 1990 to the subprime mortgage crisis, and significantly higher than the previous tightening cycle. It is difficult to assert that inflation will return to the 2% medium-term target in the short term from the current inflation distribution, and the interest rate pivot is likely to remain elevated.
1. Comments on April CPI data The CPI in the United States in April was 3.4% year-on-year, unchanged from the expected value and lower than the previous value of 3.5%; The core CPI was 3.6% year-on-year, unchanged from the expected value and lower than the previous value of 3.8%. Both CPI and core CPI grew by 0.3% month-on-month. After the release of the data, the market's expectations for interest rate cuts in September have increased slightly, and the annual rate cut is still expected to be 50~75bp. The U.S. dollar index fell below 105, U.S. Treasury yields fell, crude oil fell, and gold and U.S. stocks rose. Judging from the year-on-year data, core goods are still deflationary, core services have slowed down slightly compared with the previous month, and energy has turned from negative to positive year-on-year. From the perspective of elasticity and stickiness CPI classification, the core elastic CPI weakened year-on-year, and the core sticky CPI rebounded year-on-year. The services sector remains the main source of inflation. Judging from the month-on-month data, except for the negative month-on-month growth rate of core goods, the month-on-month growth rate of other items is still high.
From the perspective of CPI sub-items, the core goods category mostly weakened year-on-year, the housing in the core service category slowed down slightly year-on-year, and other items were basically stable or slightly higher year-on-year. Food remained stable year-on-year. Energy is temporarily out of deflation year-on-year. The PCE in the United States rebounded year-on-year in March and the core PCE slowed down year-on-year. Services rebounded year-on-year, with housing, medical care, transportation, and insurance being the main driving items. Deflation in core commodities eased, while energy turned positive year-on-year.
1.1 Commodities In terms of commodity prices, despite the recent decline in crude oil prices, oil prices continued to rise year-on-year due to the low base in the same period last year. The pressure on the supply chain has fallen marginally, the price of used cars has fallen year-on-year but the decline has slowed down, and the core goods have remained sluggish year-on-year. Among food prices, meat prices stabilized year-on-year, and cereal prices are expected to bottom out year-on-year.
1.2 The contribution of housing in service prices has declined, but other sub-items have basically stabilized month-on-month, so that the month-on-month growth rate of service prices is still at a historically high level. Due to the lagged impact of housing prices on housing CPI, the month-on-month contribution of housing is likely to remain around 0.15% in the next few months, and there is even a possibility of further acceleration.
2. Outlook This month's lower-than-expected inflation data was mainly due to the year-on-year deflation of core goods and a slight slowdown in the year-on-year growth rate of core services. Although the 0.3% month-on-month growth rate of CPI and core CPI fell from 0.4% in the previous month, the month-on-month growth rate of 2% for inflation to return to 2% is still high. With a month-on-month growth rate of 0.3% or more, there will be more significant reinflation in the second half of the year. The St. Louis Fed price pressure gauge also continues to point to a higher risk of reflation in the second half of the year. It is difficult to be optimistic about the further substantial progress in US disinflation based on the monthly data alone, and we maintain the judgment that the Fed will cut interest rates by 0-50bp in 2024, that is, there is a possibility that there will be no rate cuts.
Annotation:
[1] For details https://www.frbsf.org/research-and-insights/data-and-indicators/pce-personal-consumption-expenditure-price-index-pcepi/
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