CITIC Securities Co., Ltd.: There are concerns about a rebound in U.S. inflation, and the possibility of the Federal Reserve lowering interest rates in July is small

According to the Zhitong Finance APP, CITIC Securities released a research report stating that the inflation in the U.S. for June essentially continued the "peaceful times" state, with the core CPI's month-on-month growth rate being below expectations for the fifth consecutive month, mainly due to cooling rent inflation and used car prices. This relatively soft core inflation cannot validate the hypothesis that "tariffs have a minor impact on inflation." In fact, the tracking indicators such as the "CPI with high import content" constructed by CITIC Securities show that tariffs have begun to affect the prices of U.S. import-sensitive consumer goods. CITIC Securities still believes there are concerns about a rebound in U.S. inflation, the likelihood of the Federal Reserve cutting interest rates in July is low, and there may be a maximum of two rate cuts within the year, with limited space for the continued weakening of the U.S. dollar, and the current attractiveness of U.S. Treasury bonds may still not be strong.

CITIC Securities' specific views are as follows:

The overall CPI in the U.S. for June rose 0.3% month-on-month, the core CPI rose 0.3% month-on-month (lower than the expected 0.2%), the overall CPI rose 2.7% year-on-year (higher than the expected 2.6%), and the core CPI rose 2.9% year-on-year as expected. All four readings are higher than the previous values, and the core CPI month-on-month has been below expectations for five consecutive months.

This relatively soft core inflation is a good thing, but there is no need to be too pleased, as its sustainability is questionable.

The U.S. dollar index immediately fell after the release of this CPI data, indicating that the market was somewhat satisfied with this reading, especially seeming pleased with the core CPI month-on-month being below expectations for five consecutive times. The moderate reading of core inflation in the U.S. for June is mainly attributed to the narrowing month-on-month increase in housing items (from the previous value of 0.3% to the current value of 0.2%, with the away-from-home lodging item month-on-month dropping from -0.1% to -2.9%) and the expanded month-on-month decline in used car prices (from -0.5% to -0.7%). Both of these are not directly related to imported goods and cannot reflect the potential impact of tariffs, and such low readings raise questions about their sustainability. CITIC Securities calculated that after excluding these two items, the contribution of other components to the core CPI month-on-month has risen from the previous value of 0.03 ppts to 0.17 ppts, which is clearly not strong evidence to validate the hypothesis that "tariffs have a minor impact on inflation."

In fact, CITIC Securities' tracking indicators show that tariffs have begun to affect the prices of U.S. import-sensitive consumer goods.

In the report "Overseas Macroeconomic Special - Tracking the Transmission Process of Tariffs: Who Bears the Cost?" (2025-07-10), CITIC Securities constructed the overall "CPI with high import content" for the U.S., which saw a month-on-month growth rate (3MMA) rise from the previous value of 0.03% to 0.11% in June, while the "CPI with high Chinese content" rose from 0.10% to 0.29%, and the month-on-month CPI excluding Mexico and Canada remained basically flat (slightly up by 0.01%). This indicates that the prices of U.S. import-sensitive consumer goods have begun to rise, and the process of passing tariff costs from importers to consumers has already started. CITIC Securities still expects that U.S. companies will be able to pass on most of the tariff costs to the residential sector, and this process may continue for about six months (see "Commentary on U.S. CPI in April 2025 - Not Easily Sustainable 'Good Data'" 2025-05-14) The likelihood of the "letter tariff" becoming a reality is low, but the potential impact of existing tariffs should not be underestimated.

CITIC Securities estimates that if Trump's "letter tariff threat" materializes by July 12, assuming the USMCA exemptions continue to apply, the overall effective tariff rate in the United States will rise from the current level of about 13.3% to approximately 16.9%. This would increase the U.S. PCE deflator index by about 1.1% and reduce the size of the U.S. GDP by 0.4% in the long term. CITIC Securities tends to view the "letter tariff" merely as a bargaining chip for Trump in negotiations with trade partners and believes that the possibility of it being fully implemented is low. Nevertheless, many tariff measures have already taken effect in the White House, and the effective tariff rate during the current "reciprocal tariff exemption period" has exceeded 10%. The "peaceful" state of U.S. inflation may soon come to an end. CITIC Securities still believes there are concerns about a rebound in U.S. inflation in the second half of this year, and it is necessary to pay attention to the risk of the overall CPI year-on-year continuing to exceed 3% in the second half. In this context, the likelihood of the Federal Reserve cutting interest rates in July is low, and the market consensus expectation of two rate cuts within the year is relatively reasonable but carries the risk of downward revision. The space for further weakening of the U.S. dollar may be limited, and the attractiveness of U.S. Treasury bond allocation is currently still not strong.

Risk factors:

U.S. economic growth momentum is weaker than expected; the impact of tariffs on inflation is less than expected; U.S. labor demand is weaker than expected; policy changes in various countries exceed expectations; market liquidity or sentiment changes exceed expectations