Summary of Key Points
The U.S. CPI for May is expected to rise year-on-year to 4.2% (from 3.8% in April), with the core CPI (excluding food and energy) increasing slightly to 2.9%. The main drivers of inflation include the surge in energy prices due to conflicts in the Middle East, shortages in supply chain materials, lingering effects of tariffs, and the boom in AI investment. The Federal Reserve is facing a policy dilemma: strong non-farm payroll data has raised market expectations for interest rate hikes (with nearly 75% probability of at least one hike this year), and the possibility of a rate cut has virtually disappeared, although there are disagreements among institutions regarding whether to raise rates.
1. Why Did CPI Rise in May? Energy and Supply Chain Issues Are the Main Drivers
- Energy Prices Soar: Conflicts in the Middle East (between the U.S. and Iran) have disrupted the transportation of commodities, leading to sharp increases in gasoline prices. Additionally, energy prices were particularly low last May, creating a "base effect" that makes this year's increase seem more significant.
- Housing Costs Show Some Moderation but Still Contribute: Previous statistical adjustments caused a temporary spike in "equivalent rent for homeowners" (a key component of housing costs in CPI). Although these costs are expected to slow down in May, they will still contribute to the overall inflation rate.
- Other Categories Are Also Rising: Tariffs are preventing prices of new and used cars, household appliances from falling; shortages of semiconductors are driving up the cost of computers and electronic devices. Airline fuel prices have increased, making机票 more expensive, while hotel prices have decreased slightly, but service-related costs (such as dining and entertainment) have risen moderately.
2. Inflation Spreading to More Industries, with Costs Being Passed On to Consumers
- Manufacturing Facing Challenges: The U.S. manufacturing PMI rose in May, indicating expansion in production, but there are shortages of materials like aluminum, semiconductors, and steel for over two months, prolonging delivery times.
- Transportation Costs Rising: The average diesel price across the country has reached $5.4 per gallon (about $1.43 per liter). Truck companies pass on these higher costs to manufacturers, who in turn add them to the prices of their products and sell them to consumers.
- AI Investment Driving Inflation: Companies are investing in AI-related equipment and hiring, increasing demand for related goods and services. Sixteen industries (including papermaking and machinery) have reported rising material costs, with no industry showing price declines, indicating that inflation is spreading across various sectors.
3. The Federal Reserve Is in a Dilemma: High Probability of Rate Hikes, No Chance of Cuts
- Strong Non-Farm Data: Previously, the Fed hesitated to raise rates, but now, with positive non-farm data, markets expect it to do so, with a nearly 75% probability of at least one hike this year.
- Divided Opinions Within the Fed: Although the Fed has kept interest rates unchanged this year, there were four dissenting votes at its April meeting (the most since 1992), indicating disagreement on the next steps.
- Non-Farm Data Fuels Expectations: The sharp increase in non-farm payroll numbers (172,000 new jobs in May, up from an expected 85,000) and revised April figures suggest a strong labor market, leading some to believe the Fed does not need to worry about employment and can focus on controlling inflation.
- Changing Market Expectations: Goldman Sachs has abandoned the possibility of a rate cut this year, pushing the timeline for a cut to 2027. Futures markets indicate a nearly 75% probability of at least one hike this year.
4. The Labor Market Seems Strong, but There Are Undercurrents of Concern
- Employment Data Looks Good: The unemployment rate has remained at 4.3% for three months, and the number of new jobs is higher than expected, with average employment levels returning to pre-pandemic levels.
- Underlying Issues: The proportion of long-term unemployed individuals is at its highest since the pandemic; wage growth is slow and cannot keep up with inflation (for example, if your salary only increases by 2% while prices rise by 4%, you can buy fewer things).
- Weaker Bargaining Power for Workers: Even with low unemployment rates, employers are not willing to offer higher wages.
5. Disagreements Among Institutions: Raise Rates or Stay Put?
- Divergent Views from Experts: There is no consensus among experts on the Fed's next move. Some suggest a rate hike, while others warn against hasty action.
- Those Favoring Stability: Schwartz from Oxford Economics believes the Fed may prefer to maintain the status quo due to underlying issues in the labor market.
- Cautious Hikers of Rates: Allen from Pantheon argues that inflation is not out of control (unlike in 2021-2022), but a rate cut would make life difficult for ordinary families.
- Prolonged High Interest Rates: Goldman Sachs expects interest rates to remain high for an extended period, with strong demand from AI-related investments supporting higher borrowing costs.
In summary, the May CPI data will significantly influence the Fed's decision-making. Consumers are likely to face continued high prices and increased financial pressure for some time to come.