By Sun Changzhong, a researcher at Tsinghua University's Global Private Equity Institute
The stubborn higher-than-expected inflation data since 2024 has lasted for three months, which is indeed a bit long and seems to be sustained, but there are still considerable seasonal and temporary factors. Since April, although it has been inevitable that the period will be tortuous, it should have resumed the downward trend overall.
On May 15, the U.S. Department of Labor released the April CPI data: the U.S. CPI in April increased by 3.4% year-on-year, unchanged from expectations, slightly lower than the previous month's 3.5%, and increased by 0.3% month-on-month, lower than the expected and previous value of 0.4%; Excluding food and energy, the core CPI rose 3.6% year-on-year, unchanged from expectations, lower than the previous value of 3.8%, and increased by 0.3% month-on-month, unchanged from expectations, lower than the previous value of 0.4%. It is worth noting that the year-on-year increase in core CPI in April was the lowest since April 2021, and the month-on-month growth rate fell for the first time in six months.
Although the CPI data is not the basis for the Fed's decision-making, it still has a certain reference value, and it was released earlier, which has attracted wide attention. April's CPI data confirms the author's view in last month's article "Why the U.S. "Secondary Inflation" Won't Happen": the stubborn inflation data that has been higher than expected since 2024 has been higher than expected for three consecutive months, which is indeed a bit long, and seems to be continuous, but there are still considerable seasonal and temporary factors. From April onwards, although it is inevitable that there will be twists and turns, it should be a general resumption of the downward trend.
The main contributors to stubborn inflation since 2024 are three major components: oil prices, rents and services. The cooling of inflation in April and the continued downward trend in the next step are also mainly due to these three parts.
From the perspective of oil prices, the spot price of Brent crude oil fluctuated after peaking at $93.6/barrel on April 12, and has fallen to $80.6/barrel as of May 14. The West Texas Intermediate (WTI), which is used in the United States, has fallen from $86/b in mid-April to around $78/b currently. Considering the slight lag in price transmission, it is expected that the CPI energy item will cool down in May. In the next step, oil prices are expected to stabilize and decline as demand slows due to the cooling of the U.S. economy and the situation in the Middle East tends to ease.
The cost of living is weighted by up to one-third of the CPI index. As most tenants' rents only change once a year, new lease rents are statistically lagging behind and longer than expected. The seasonally adjusted rent to landlord equivalent rent remained at 0.4% in April, but the unseasonally adjusted month-on-month growth weakened to 0.3%. Month-on-month rent growth moderated, raising hopes for further downward inflation.
In 2023, a record 93,000 new rental single-family homes were completed in the United States; Another 99,000 new rental homes are under construction this year. The increase in supply is conducive to controlling the rise in rents and even driving them down. On the downside, the willingness to buy a house continues to be sluggish due to the impact of high interest rates, and the demand for tenants to renew their leases is higher, which may prolong the statistical lag time of the decline in rents for new leases; The demand for newly built apartments is increasing massively due to increased immigration and rising incomes, which could lead to a resurgence in the single-family housing market. According to real estate firm Camden Property Trust, the percentage of its apartment tenants moving out has now fallen to 9%, the lowest level in the company's 30-year history. Typically, the eviction rate is 15%-18%. At the same time, however, it should be noted that migrants' ability to pay is often limited, and income growth is also cooling. Many economists expect residential inflation to continue to decline, falling below 4% by the end of the year, close to historical normal.
To look at services inflation, we must first look at employment and income. The slowdown in this area was already evident in the previous two months, and was even more pronounced in April. Data released by the U.S. Department of Labor on May 3 showed that non-farm payrolls increased by 175,000 in April, significantly lower than the expected 240,000, and the difference between expectations was the largest since December 2021, the unemployment rate increased to 3.9%, the year-on-year growth rate of average hourly earnings fell for two consecutive months, and the month-on-month growth rate was also lower than expected and the previous value, and the average weekly working hours decreased slightly. Recent research by the San Francisco Fed showed that excess savings of US residents turned negative in March. According to the April retail sales data released by the U.S. Department of Commerce, retail sales in April had zero month-on-month growth, well below market expectations of 0.4%, and the March growth data was also revised downward to 0.6% from 0.7%. These data all point to a cooling of the U.S. job market, slower income growth, and easing inflationary pressures.
To observe U.S. inflation and Fed policy, it is still necessary to focus on and analyze PCE data, which is the basis for the Fed's decision-making, and is usually lower than CPI data. An analysis of the March PCE data showed that the higher-than-expected data for the first quarter was mainly due to an upward revision of the January data. This shows that in the first quarter, the two months after January tend to decline, the stubbornness of inflation is not so prominent, and it also contains a trend signal of an overall decline in inflation, and it is expected that the next PCE data may be more obvious.
Article source丨Published with the author's authorization
This article is edited by Wang Mao
Editor-in-charge丨Ding Kaiyan, Lan Yinfan
Preliminary trial丨Xu Lanying
Final Review丨Zhang Wei
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