The disturbance of unexpected factors such as the conflict between Russia and Ukraine and the rebound of the Chinese epidemic on the supply chain has added uncertainty to the subsequent interpretation of US inflation. In order to better analyze the dynamics of inflation, we apply three scenario assumptions of optimism, neutrality and pessimism to the inflation prediction model, and tend to the neutral assumption. It is expected that US inflation will peak and fall in April. At that time, CPI will increase by 8.7% year-on-year and fall to less than 6% at the end of the year.
With US inflation continuing to exceed expectations, Bloomberg economists' forecasts for US inflation have been raised several times (Figure 2). The complexity of US inflation in 2022 lies in the disturbance of internal and external factors:
On the one hand, the wage inflation spiral and rent inflation in the United States and China are still in focus, and the growth rate shows no sign of slowing down.
From the perspective of wages, since October 2021, the average hourly wage growth rate of the U.S. private industry has generally exceeded 5%. However, the salary increase has failed to compensate for the dilution of inflation on real wages. The trend between real wages and those before the epidemic is still expanding, and the gap at the end of 2021 is about 3% (Fig. 3-fig. 4). The New York Fed consumer survey also shows that American households expect wage growth to be less than inflation (Figure 5). In view of the current tight supply in the labor market, in order to attract and retain employees, we expect that the salary increase trend of American enterprises will be difficult to reverse in the short term (Figure 6).
From the perspective of rent, according to our analysis of historical data, the S & P US house price index is about 15 months ahead of rent. The index peaked and fell in August 2021. Therefore, it is estimated that the decline of housing rent growth will wait until at least the beginning of 2023 (Figure 7).
On the other hand, under the conflict between Russia and Ukraine and the rebound of the epidemic in China, the rise of bulk prices and the disturbance of the supply chain increase the uncertainty of inflation risk.
How much does the conflict between Russia and Ukraine affect US inflation? The OECD released a report in March 2022, which measured the impact of the Russian Ukrainian conflict on the global economy. It is expected that the Russian Ukrainian conflict may drag down the US GDP by nearly 0.9% in the next 12 months, push up inflation by 1.4%, and exacerbate the risk of stagflation (Figure 8).
We expect that the impact of the Shanghai epidemic on the supply chain will begin to appear in April. In addition to the shutdown of factories, the shortage of truck drivers under the blockade has had an impact on logistics. On April 6, oceannetwork express, a shipping company of Japan Ocean network, said that the shortage of trucks was hindering the customs clearance of imported goods in Shanghai. The accumulation of containers in ports and the increase of queues of coastal ships may lead to more delays and push up freight rates (Figure 9). In addition, the shortage of truck drivers has also caused a shortage of raw materials from coastal ports to inland factories, affecting the production of the two major manufacturing centers of Zhejiang and Jiangsu. The impact of the future epidemic on China's exports may prolong the delivery period and aggravate the interruption of the global supply chain.
In order to better understand the subsequent interpretation of US inflation, we tested the inflation model in three scenarios:
Optimistic scenario: the conflict between Russia and Ukraine eased in the second quarter of 2022, the WTI oil price fell to $85 / barrel (the same unit below), and the NYMEX natural gas price increased slightly and steadily throughout the year, reaching $6.8/million British heat (the same unit below) from April to December. We expect the inflection point of US inflation to be in March, when CPI will increase by 8.66% year-on-year and fall back to 5.48% at the end of the year.
Neutral scenario: WTI oil price dropped to 90 during the year, and NYMEX natural gas was 7.1 from April to December. We expect the inflection point of US inflation to be in April, when CPI will increase by 8.72% year-on-year and fall back to 5.93% at the end of the year. We prefer neutral scenario hypothesis.
Pessimistic scenario: the conflict between Russia and Ukraine will continue in 2022. The WTI oil price recorded 97 at the end of the year, and the NYMEX natural gas center was 7.3 from April to December. We expect the inflection point of US inflation to be in April, when the CPI will increase by 8.93% year-on-year and fall back to 6.14% at the end of the year.
March CPI data is the last CPI report before the Federal Reserve's interest rate meeting in May. If inflation remains strong, the market expectation that the Federal Reserve will raise interest rates by 50bp and accelerate the contraction of the table in May will be consolidated. On April 11, 2022, the federal funds rate futures showed that the market expected to raise interest rates to 2.6% within the year. Under the background of better employment and unabated momentum of soaring inflation, the attitude of Fed officials has become more hawkish. With the radical pace of interest rate increase and the upcoming contraction in May, we raised our forecast for the 10-year US bond interest rate. It is expected that the US bond interest rate from April to may may may last between 2.5% - 3% for some time.
Risk tip: the epidemic spread exceeded expectations, and the policy hedging economic downturn was less than expected
