Haitong Securities: US Inflation Cools Down: Car Prices Drop, Rent Stabilizes

Haitong Securities released a research report indicating that the February 2025 price data in the United States shows a decline in core inflation, mainly influenced by used car prices. The key to the rebound in core inflation in January was the prices of used cars, while the easing in February was also related to inflation in used cars and non-rent services. The market expects the Federal Reserve to cut interest rates in June, with a total expected reduction of 75 basis points in 2025. The year-on-year CPI in February was 2.8%, and the year-on-year core CPI was 3.1%

According to the Zhitong Finance APP, Haitong Securities released a research report commenting on the U.S. price data for February 2025. The team believes that the key to the rebound in U.S. core inflation in January lies in used car prices, rather than housing. Similarly, the key to the easing of core inflation in February is also not housing, but rather the contributions from used car prices and non-rent service inflation. Currently, market expectations for interest rate cuts remain stable. According to CME observations, as of March 13, the market expects the Federal Reserve is likely to cut rates in June, with an anticipated total rate cut of around 75 basis points by 2025.

The following is a summary of the research report:

Why has core inflation retreated? Rent inflation remains relatively stable. In February, the year-on-year rent for primary residences and the year-on-year equivalent rent for homeowners both further slowed; however, both maintained around 0.3% month-on-month, which is basically consistent with the past three months. The decline in car prices has made a significant contribution. In February, the year-on-year inflation for used cars dropped significantly to 0.8%, and the month-on-month rate also fell sharply from 2.2% in January to 0.9%. The easing of non-rent service inflation also contributed significantly.

Overall, the key to the rebound in core inflation in January was used car prices, rather than housing. Similarly, the key to the easing of core inflation in February is also not housing, but rather the contributions from used car prices and non-rent service inflation.

Market expectations for interest rate cuts remain stable. According to CME observations, as of March 13, the market expects the Federal Reserve is likely to cut rates in June, with an anticipated total rate cut of around 75 basis points by 2025.

The following is the full text:

U.S. core inflation has retreated. In February, the U.S. CPI year-on-year was 2.8%, a slight decrease of 0.1 percentage points from January. The core CPI year-on-year was 3.1%, a significant decrease of 0.2 percentage points from January, marking the lowest level since April 2021. Month-on-month, the CPI in February was 0.2%, a significant decrease of 0.3 percentage points from January; while the seasonally adjusted month-on-month core CPI was also 0.2%, a significant decrease of 0.2 percentage points from January. Additionally, the seasonally adjusted month-on-month core CPI annualized rate in February dropped significantly to 2.8%.

From the CPI structure, the retreat in inflation in February is related to the decline in energy and core inflation. In February, energy inflation year-on-year was -0.2%, a decrease of 0.8 percentage points from January; energy inflation month-on-month was 0.2%, an increase of 0.9 percentage points from January. In February, core inflation year-on-year retreated to 3.1%, and core inflation month-on-month retreated to 0.2%. It can be seen that, apart from energy inflation, the contribution of core inflation retreat is also significant.

Why has core inflation fallen? From the perspective of core inflation weights, the weight of core services is relatively higher, close to about 80%, while the weight of core goods is around 20%. Rent inflation remains relatively stable. In February, the year-on-year rent for primary residences and the year-on-year equivalent rent for homeowners both further slowed down, leading to a 0.2 percentage point decrease in core services inflation to 4.1%. However, both remained around 0.3% month-on-month, which is basically the same as the past three months. Therefore, the month-on-month decline in core inflation in February is unrelated to housing.

The decline in car prices has made a significant contribution. In February, the year-on-year inflation for used cars dropped sharply to 0.8%, a decrease of 0.2 percentage points from January. Month-on-month, it also fell significantly from 2.2% in January to 0.9%. The decline in used car inflation pushed down the month-on-month core goods inflation by 0.1 percentage points in February. Therefore, the drop in car prices has contributed to the decline in core inflation in February.

The easing of non-rent service inflation has also made a significant contribution. In February, the month-on-month service inflation excluding rent slowed to 0.4%, and its year-on-year rate also fell by 0.1 percentage points to 3.8%. For example, in February, public transportation inflation fell by 3.4% month-on-month, movie ticket inflation dropped to 0.3% month-on-month, and leisure service inflation also decreased to 0.8% month-on-month.

Overall, the key to the rebound in core inflation in January was the price of used cars, not housing. Similarly, the key to the easing of core inflation in February is also not housing, but rather the prices of used cars and non-rent service inflation. Market expectations for interest rate cuts remain stable. According to CME observations, as of March 13, the market expects that the Federal Reserve is likely to cut interest rates in June, with an expected total cut of around 75 basis points by 2025.

Risk warning: Federal Reserve monetary policy may exceed expectations