Zhongjin: It is predicted that the year-on-year US CPI in May will "break four".

Zhongjin released a research report stating that at 8:30 pm on Wednesday this week, the US CPI data for May will be announced. According to Zhongjin's model calculation, both overall CPI and core CPI in May showed a "month-on-month decline, year-on-year increase" situation, with core CPI slightly lower than the consensus expectation, while the rest were basically in line with market expectations. Overall CPI: May month-on-month 0.54%, consensus expectation 0.5%, previous value 0.64%; May year-on-year 4.24%, consensus expectation 4.2%, previous value 3.81%. Core CPI: May month-on-month 0.23%, consensus expectation 0.3%, previous value 0.38%; May year-on-year 2.85%, consensus expectation 2.9%, previous value 2.75%. Zhongjin's main points are as follows: There are two main factors affecting this inflation data. 1) High oil prices: In May, the situation in Iran is still fluctuating, leading to a further increase in the average price of Brent crude oil to $103.7 per barrel (vs. April average of $102.5 per barrel), and the average retail gasoline futures price also rose to $4.61 per gallon (vs. April average of $4.26 per gallon). As a result, it is predicted that the energy sub-index in May will still rise sharply by 6.3%, and transportation services will also increase by 0.5% due to the increase in aviation fuel prices. 2) Decline in rent: Due to the disturbance caused by the government shutdown last year, the main rent and equivalent rent in April rose by 0.55% and 0.53% respectively, roughly double the normal level. Starting from May, the disturbance caused by the statistical method will diminish, and the main rent and equivalent rent will fall to 0.21% and 0.24% respectively, returning to average levels. The core CPI in this period has returned to normal levels, but the overall CPI remains high, indicating that the main issue is still oil prices. However, the "good news" is that with tariffs raising prices from May last year, it means that from May this year, the base will gradually rise, pushing inflation back down. The CPI year-on-year has exceeded 4% mainly due to the rapid rise in energy (especially gasoline) month-on-month, offsetting the base effect on year-on-year suppression. Therefore, as long as the month-on-month increase in oil prices slows down, the high base is expected to drive CPI year-on-year down. Under normal circumstances, Zhongjin predicts that the peak of inflation may occur in May to June, unless oil prices spiral out of control. What does this mean for the Federal Reserve? Zhongjin's calculation indicates that if the central crude oil price in the second half of the year does not drop below $100, there will be no rate cut; however, if the oil price returns to $80-90, it can drive CPI below 3%, still leaving room for a rate cut. But if it exceeds and remains above $120, there will be pressure to raise rates, corresponding to CPI year-on-year exceeding 4.5%. The threshold is still relatively high. After the non-farm payroll exceeded expectations last week, the market began to factor in the expectation of a rate hike in December 2026, which may be overly pessimistic based on the above calculations. It may be difficult for the Fed to cut rates in the short term, but it can still avoid raising rates temporarily despite temporarily overshooting, unless a significant escalation in the situation in Iran causes oil prices to remain high.