CICC: U.S. inflation may see an upward turning point in the next 1-2 months

According to the Zhitong Finance APP, CICC has released a research report stating that tariffs have actually led to a partial rebound in U.S. inflation, but the flaws in seasonal adjustment methods have underestimated inflation by nearly 20 basis points over the past two months, and the CPI readings have not yet reflected the true situation of the inflation rebound. CICC predicts that the CPI month-on-month may confirm an upward turning point in the next 1-2 months, with the earliest verification on August 12. The year-on-year upward cycle of CPI may last for about a year, and the increase in inflation can be estimated using input-output tables. The U.S. inflation has entered an upward cycle, which may disrupt the Federal Reserve's interest rate cut rhythm and bring new variables to global assets.

CICC's main viewpoints are as follows:

Why has U.S. inflation not rebounded despite a significant increase in tariff rates?

Since the beginning of the year, the average tariff rate in the U.S. has risen sharply from 2.3% to 18.4%, yet U.S. inflation remains low. The market generally expects that tariffs will only lead to mild or temporary inflation, and even doubts that tariffs will cause significant inflation. We believe that market pricing may underestimate the risk of a rebound in U.S. inflation. There are three key factors that have delayed the transmission of tariff-driven inflation. Once these factors change, the rebound in U.S. inflation may "arrive late but surely":

1. Statistical method flaws have underestimated recent inflation. U.S. inflation has strong seasonality and requires statistical models to eliminate seasonal variations. After the pandemic, the seasonality of inflation has undergone a mutation, and the current seasonal adjustment model has flaws that may cumulatively suppress the inflation level in May and June by about 20 basis points. Using a corrected seasonal adjustment method, the month-on-month growth rate of the U.S. core CPI has actually turned upward. Additionally, many CPI item categories (such as clothing, home appliances, automobiles, etc.) are sampled only once every two months, leading to a lag in CPI reflecting price changes. Finally, due to budget cuts and a federal hiring freeze, the U.S. Bureau of Labor Statistics has recently been forced to reduce its CPI data sampling network, further lowering data accuracy and timeliness.

Chart: The corrected month-on-month growth rate of the U.S. core CPI has actually started to rise in April and May,

but the officially published core CPI month-on-month remains low.

Source: Haver, CICC Research Department

1. Corporate behavior adjustments extend inflation transmission. In addition to "rushing imports" to avoid tariffs, U.S. importers can defer tariffs by placing goods in bonded areas. Some U.S. importers may temporarily bear the tariff costs themselves and have not yet raised prices for final products, sharing some of the pressure with consumers.

2. Economic growth slowdown offsets tariff pressure. U.S. inflation can be divided into goods inflation and services inflation. Recently, the slowdown in U.S. economic growth and reduced domestic demand have significantly lowered services inflation, partially offsetting the upward pressure on goods inflation caused by tariffs.

U.S. inflation may welcome an upward turning point in the next 1-2 months.

Among the three factors that have delayed the transmission of tariff inflation, we find that the first two factors may turn to support inflation upward: the suppressive effect of the flaws in the seasonal adjustment model on inflation readings may basically disappear in the July data, allowing the seasonally adjusted inflation month-on-month growth rate to return to its true increase At the same time, the lagging effect caused by the bi-monthly statistics dissipates over time. Currently, the "import rush" in the United States has basically come to an end, and some core commodities have begun to show significant price increases, which are being transmitted to overall inflation. Our inflation sub-item model predicts that in the next 1-2 months, we will see an upward turning point in core CPI month-on-month, with the month-on-month central tendency rising from 10-20 basis points to 30-40 basis points, driving core CPI back above 3%, which may be validated in the July CPI data to be released on August 12. The year-on-year turning point for CPI inflation actually appeared in April, but it reflects more of a base effect, providing limited insights for the market; the month-on-month turning point is what determines market pricing.

The prevailing market perception is that tariffs lead to "temporary" or "one-time" inflation, but in fact, U.S. imports include both final goods and intermediate goods. Imposing tariffs on final goods will lead to a one-time price increase, creating temporary inflation. However, imposing tariffs on intermediate goods will slowly release price increase pressure through the supply chain, leading to persistent inflation. The inflation impact of tariffs on final goods and intermediate goods is cumulative, and we expect this round of inflationary upcycle may last nearly a year and will not end quickly.

We use the input-output table of U.S. imported products to measure both the direct and indirect effects of tariffs on different inflation sub-items, and then calculate the overall impact on inflation based on the weight of each sub-item. If we assume that the tariff burden is fully borne by U.S. consumers, the final CPI inflation increase would be in the range of 110-120 basis points. However, since overseas exporters and U.S. importers will also bear part of the tax burden, and considering the substitution effect of consumption, the inflation increase caused by tariffs should be less than 120 basis points. Therefore, the peak of this round of inflation may be significantly lower than the inflation upcycle of 2021-2022 (with the peak CPI inflation in 2022 being 9%).

It is important to note that the current U.S. policy and economic uncertainty is very high, and there are still significant variables in the U.S. inflation path. For example, if U.S. economic growth declines significantly or even falls into recession, the contraction in domestic demand may completely offset the impact of tariffs on inflation, lowering inflation levels; if tariff policies are further adjusted, it will also change the inflation path; recently, Trump dismissed the head of the U.S. Bureau of Labor Statistics[1] (which is responsible for non-farm employment and CPI data statistics), and if the independence of U.S. statistical agencies is affected as a result, it may also increase the error in inflation forecasts.

Policy Implications: The rebound in inflation may constrain the Federal Reserve's rate-cutting pace, increasing uncertainty in monetary policy.

Due to the U.S. July employment data being significantly below market expectations, and the substantial downward revision of employment data for May and June (also affected by seasonal adjustments and other statistical model flaws), the market expects the Federal Reserve to start cutting rates in September, with expectations of three rate cuts this year, which has driven U.S. stocks to rebound against the trend after the non-farm payroll collapse.

However, based on the analysis above, due to the possibility of an upcoming upward turning point in U.S. inflation, we believe that the path of Federal Reserve rate cuts may still have considerable uncertainty: if economic growth further declines significantly or falls into recession, the Federal Reserve can certainly cut rates quickly. However, if growth remains stable while inflation rises, leading the U.S. economy into stagflation, the Federal Reserve may find itself in a "dilemma" and may not be able to cut rates quickly and continuously We believe it is still impossible to determine whether the U.S. economy will head towards recession or stagflation, thus the path for interest rate cuts in 2025 remains highly uncertain. The inflation caused by tariffs is mainly concentrated in the next year, so we believe the likelihood of the Federal Reserve significantly cutting interest rates in 2026 is clearly increasing.

Asset Insights: Inflation may cause market disturbances, U.S. stocks and bonds may come under pressure, the dollar may benefit in the short term but uncertainty increases in the medium term, while gold and Chinese assets are relatively resilient.

If the inflation model predictions come true and U.S. inflation rebounds rapidly, it may disrupt the Federal Reserve's interest rate cut expectations, adversely affecting most assets such as stocks, bonds, and commodities, with U.S. stocks and bonds being the most impacted. Given that U.S. stock valuations remain relatively high, and whether in stagflation or recession, the outlook for stocks is unfavorable, we recommend underweighting U.S. stocks. Rising inflation is a short-term negative for U.S. bonds, but as discussed earlier, the risks of economic slowdown and recession are favorable for U.S. bonds, and the pressure on U.S. debt issuance is actually not significant. Therefore, the investment cost-effectiveness of U.S. bonds may be relatively better than that of U.S. stocks, although short-term volatility may also increase. If inflation rebounds and suppresses interest rate cut expectations, it may be beneficial for the dollar in the short term. However, considering the bankruptcy of the "American exceptionalism" narrative, the dollar is entering a long-term downward cycle, and we believe we cannot completely rule out the risk of a "triple whammy" for dollar assets (stocks, bonds, and currency), so we maintain a wait-and-see approach towards the dollar.

Changes in the dollar and U.S. bond interest rates may affect non-U.S. asset classes, but market volatility also provides opportunities for accumulation. We suggest that gold and Chinese assets may be relatively resilient and recommend increasing allocation on dips. Whether in stagflation or recession in the U.S., or in 2026 with monetary easing and fiscal deficit expansion, all are favorable for gold, which remains a superior asset to cope with macro uncertainties. Following the macro policy shift on September 24 and the emergence of DeepSeek, the revaluation of Chinese assets has already begun. The reconstruction of the international monetary order and the global reallocation of funds, combined with ample domestic liquidity, further support the performance of Chinese assets. We expect that after the macro risks from both domestic and foreign sources are largely released in mid to late August, the allocation value of Chinese stocks may further stand out, and we recommend gradually increasing allocation to technology growth stocks that represent new productive forces