Shenwan Hongyuan: The U.S. "de-inflation" may proceed slowly, with uncertainty mainly stemming from Tariff 2.0

According to the Zhitong Finance APP, Shenwan Hongyuan Securities released a research report stating that the U.S. CPI inflation in December was weaker than market expectations, temporarily suppressing the previous "inflation trade." Structurally, the weakening of durable goods inflation is the main reason. The firm indicated that the U.S. may still show a slow "de-inflation" in 2025, with uncertainty mainly coming from Tariff 2.0. Overall, in 2025, there is still considerable room for wage growth and a decline in core non-rent service inflation, and the job market may later turn into a "de-inflation" driver. If the impact of Trump 2.0 policies is not considered, the base effect may cause the U.S. CPI year-on-year to significantly decline from January to April 2025, followed by a slight rebound, and then fall back to around 2% by the end of 2025.

Shenwan Hongyuan's main points are as follows:

1. U.S. December CPI slightly weaker than market expectations, Fed rate cut expectations slightly increased

The U.S. December CPI was slightly below market expectations, with a decline in the "breadth" and "stickiness" of inflation. The December U.S. CPI year-on-year was 2.9%, month-on-month was 0.4%, in line with market expectations, but the core CPI year-on-year was 3.2%, month-on-month was 0.2%, slightly weaker than market expectations. After the CPI data was released, market expectations for a Fed rate cut slightly increased, and Fed officials also adopted a dovish stance.

U.S. Treasury yields significantly fell, "re-inflation" trades cooled down, but policy uncertainty may still cause yields to fluctuate at high levels. This week, the 10Y U.S. Treasury yield significantly fell, with TIPS yields dropping about 14 basis points, while implied inflation expectations changed little. However, in the short term, the uncertainty of multiple policies during Trump's early presidency and the resilience of the economy may still lead U.S. Treasury yields to fluctuate at high levels.

2. Why is U.S. core inflation lower than expected? Weakness in durable goods may be the main reason

Why was U.S. inflation in December lower than market expectations? Mainly due to durable goods, followed by rent inflation. In December, global oil prices rose, driving energy CPI to significantly increase month-on-month. The main reason for the weakening of U.S. inflation in December was core inflation, with the month-on-month weakening mainly in durable goods (which pulled down CPI month-on-month by 4 basis points compared to November), followed by rent (which pulled down CPI by 2 basis points).

The cooling of U.S. durable goods inflation may mainly stem from a temporary cooling in consumption. The main determinants of durable goods consumption are income and interest rates. Recently, rising U.S. Treasury yields and a slight slowdown in wage growth may have caused durable goods consumption (weakened vehicle sales in December) and inflation to cool down. However, the Manheim used car price index suggests that vehicle inflation may rebound in the short term.

Rent inflation slightly cooled in a single month, and the trend of "de-inflation" in rents may continue. U.S. rent inflation follows the transmission logic of "housing prices - new leases - rent CPI." Although U.S. housing prices suggest that rent inflation may rebound, due to the continuous decline in the growth rate of the new lease index (NTRI) published by the BLS, rent inflation may struggle to become a factor reversing "de-inflation."

3. The narrative of "re-inflation" lingers, and attention should be paid to the "loosening" process in the labor market and Tariff 2.0 in the medium term. The process of "loosening" in the U.S. labor market encounters obstacles, which may enhance the stickiness of service inflation in the medium term. Although the growth rate of average hourly wages for U.S. residents slightly slowed in December, leading indicators of the U.S. job market, such as the U.S. ISM Services PMI Price Index and the U.S. Small Business Employment Plans Index, indicate a possibility of short-term warming in the U.S. job market, which may enhance the stickiness of service inflation in the medium term.

The U.S. may still show slow "de-inflation" in 2025, with uncertainty mainly stemming from Tariff 2.0. Overall, in 2025, there is still considerable room for wage growth and a decline in core non-rent service inflation, and the job market may later shift to a "de-inflation" driver. If the impact of Trump 2.0 policies is not considered, the base effect may cause the U.S. CPI year-on-year to significantly decline from January to April 2025, followed by a slight rebound, and then fall back to around 2% by the end of 2025.

Risk Warning

Escalation of geopolitical conflicts; U.S. economic slowdown exceeding expectations; Federal Reserve turning "hawkish" beyond expectations