CICC: It is expected that the Federal Reserve will continue to maintain a wait-and-see approach, with a potential restart of interest rate cuts in the third quarter

According to the Zhitong Finance APP, CICC released a research report stating that the core and overall CPI inflation in the United States fell in March, both lower than market expectations. The slowdown in inflation indicates that overall demand in the U.S. had already weakened before the arrival of "reciprocal tariffs," as oil prices, airfares, and hotel prices plummeted significantly. The impact of tariff shocks on core commodity prices has not yet been fully reflected, but this may begin to manifest in the coming months. Looking ahead, it is expected that U.S. price levels may experience a surge in the second quarter before demand ultimately suppresses inflation. The Federal Reserve is expected to continue to remain cautious and will not cut interest rates in the short term, with a potential restart of rate cuts in the third quarter.

In February, the U.S. core CPI adjusted month-on-month growth rate fell from 0.2% last month to 0.1%, and year-on-year decreased from 3.1% to 2.8%. The overall CPI adjusted month-on-month fell from 0.2% to -0.1%, and year-on-year decreased from 2.8% to 2.4%. From a breakdown perspective, oil prices, airfares, and hotel prices have significantly declined, reflecting that economic demand had already slowed before the arrival of "reciprocal tariffs." In March, energy commodity prices fell sharply by 6.1% month-on-month, and since entering April, WTI crude oil prices briefly dipped below $60 per barrel. The weakness in oil prices reflects, on one hand, market concerns that Trump's tariffs and government layoffs, along with the continuous decline of U.S. stocks, will suppress demand, and on the other hand, concerns about increased supply. On April 3, OPEC+ decided to increase production as scheduled starting in April and to accelerate production increases in May, which further adds downward pressure on oil prices from the supply side. CICC expects that the decline in energy prices may "help" reduce overall CPI pressure in the coming months.

In March, U.S. CPI airfare prices fell by 5.3%, continuing the decline from a 4% drop the previous month. Trump's tariff policies have undermined consumer and business confidence, leading to cuts in travel and business trip plans. The wealth effect from the stock market decline has also caused the more leisure-oriented "retirement generation" to reduce travel demand. Additionally, government spending cuts have suppressed demand for business travel. These factors have prompted airlines to become more pessimistic about their order demand for the year. Similar reasons may also lead to weak hotel demand, with hotel prices falling by 4.3% month-on-month in March. Research shows that Trump's repeated tariff policies and aggressive diplomatic statements may have made foreign tourists more hesitant about traveling to the U.S. recently, thereby impacting the U.S. tourism industry.

The core services price excluding rent (supercore), which is of most concern to the Federal Reserve, shifted from a month-on-month increase of 0.2% to a decrease of 0.2%. Aside from airfares, car rental services fell by 2.7%, and motor vehicle insurance dropped by 0.8%. Other personal services saw a noticeable month-on-month increase of 1.6%, mainly driven by a 9.5% month-on-month surge in prices for tax and accounting-related services, which may be related to a surge in demand for tax consulting services under the "ever-changing" tariff policies. The remaining service categories are still experiencing moderate increases, including medical services (0.5% month-on-month), entertainment services (0.1%), and education and communication (0.2%). The two main housing rent categories slightly increased to 0.4% month-on-month, but leading indicators have not shown signs of warming, indicating that the real estate market remains moderate The core commodity price increase has fallen from 0.2% to -0.2%. Although the impact of tariffs on the prices of imported goods has not yet been reflected, caution is still needed in the future. The price of used cars has shifted from a month-on-month increase of 0.9% to a decrease of 0.7%, and non-tire components have dropped by 2.6%. Looking ahead, with global reciprocal tariffs of 25% on steel and aluminum, 25% on automobiles, and a benchmark of 10%, along with the implementation of a 125% tariff on China[5], CICC estimates that the effective tariff rate in the U.S. may rise to 30.8%, the highest level in nearly a century. This could lead to an increase in the cost of imported goods in the U.S., gradually transmitting to the consumer end, thereby increasing the short-term inflationary risks.

One aspect to observe is how long the inventory accumulated by companies through "import rush" before the tariffs can last. Data shows that U.S. import volumes surged in January and February, and there are reports that some companies (such as Apple Inc.) have also attempted to accelerate imports from other countries before the tariffs take effect[6]. These actions may allow companies to cope with some short-term "panic buying" demand. However, the effectiveness of these measures is temporary, and as inventory depletes, there will still be pressure to raise prices in the future. CICC expects that U.S. commodity prices will experience a wave of price increases in the second quarter before demand ultimately suppresses inflation.

Overall, while the March inflation data is mild, it does not fully reflect the impact of tariffs. The Federal Reserve will continue to remain cautious and will not rush to cut interest rates due to a mild inflation report. CICC believes that the Federal Reserve is unclear about the extent of the impact of tariffs on inflation, which will keep it cautious in monetary policy, requiring at least two months of data before taking action. This means that in the short term, the "Federal Reserve put option" may no longer be effective, and the market is unlikely to receive downside protection from the Federal Reserve. The previous judgment is maintained that the next interest rate cut may have to wait until the third quarter.

Chart 1: U.S. March Core CPI Inflation Decline

Source: Haver, CICC Research Department

Chart 2: Core Commodity Inflation Month-on-Month Decline from 0.2% to -0.1%

Source: Haver, CICC Research Department

Chart 3: Non-Rent Core Services Inflation Month-on-Month Decline to -0.2%

Source: Haver, CICC Research Department

Chart 4: Major Rent Inflation Month-on-Month Growth Bounces Back to 0.4%

Note: The month-on-month growth rate of the housing rent item is calculated as the weighted average of the owner equivalent rent and the rent of primary residences.

Source: Haver, CICC Research Department