Ping An Securities: Structural clues and directions of American inflation.

Recently, the Ping An research team released a report stating that, in summary, the CPI and core CPI in the United States in 2025 will mainly depend on the trends of core services, especially housing and transportation services. In terms of quantity, the relaxation of the labor market in the previous period and the slowdown in service consumption growth may have laid the foundation for the improvement of core service inflation, but attention should be paid to the risk of service inflation rising due to Trump's immigration policy. In terms of structure, housing inflation is expected to benefit from stable market rents and continue to improve, while transportation service inflation is also expected to benefit from stable car prices and a slowdown in car insurance premium growth. In addition, energy inflation pressure is relatively manageable, while core goods inflation needs to be monitored for the impact of tariff policies. Clues from the latest US inflation data. In December 2024, the core CPI in the United States only recorded a month-on-month increase of 0.2%, lower than the expected 0.3%, after recording a consecutive increase of 0.3% for four months. The core CPI year-on-year increased by 3.2%, maintaining 3.3% for three consecutive months. Although the latest core CPI reading in the United States is lower than expected, there are different performances within the CPI structure, with several key components such as energy, transportation services, and core goods showing a higher month-on-month increase, while the year-on-year of housing and transportation services is still relatively high. We believe that the latest inflation data can mitigate the extreme "tightening panic" that has been over-interpreted, but it is not enough to convince the Federal Reserve and investors that inflation in 2025 can smoothly cool down. To further evaluate the position and direction of US inflation, it is necessary to take a longer-term view of the progress of US inflation. Evaluation of US inflation in 2024. Looking back at 2024, the overall US CPI and core CPI have successfully declined, but the decline in core CPI is not as smooth as in the CPI. In terms of pace, the CPI and core CPI experienced higher-than-expected increases in the first quarter of 2024, but inflation quickly accelerated in the second quarter, essentially making up for the lack of progress in the first quarter; the second half of the year basically reflected a "neutral" situation. Specifically looking at the CPI structure, we make two comparisons: 1) comparing December 2024 with December 2023, most key components saw a decrease in year-on-year growth rates. 2) Comparing December 2024 with December 2019, most components are still at levels higher than before the pandemic. The most significant are housing and transportation services, with contributions to the CPI year-on-year exceeding 0.51 and 0.44 percentage points respectively, totaling nearly 1 percentage point. In other words, if both could return to 2019 levels, and other components remain unchanged, the US CPI inflation rate could smoothly return to 2%. Therefore, when evaluating the future direction of US CPI, more focus should be placed on these two components. Direction of US inflation in 2025. We evaluate the future direction of US CPI from two dimensions, quantity and structure. In terms of quantity, the year-on-year growth rates of US wages and (actual) service consumption have already come down from high levels, creating space for a cooling of core service inflation. However, attention should be paid to the tightening immigration policies, which could lead to labor shortages and rising costs in the service industry. In terms of structure: 1) Regarding housing, the CPI for housing lags behind housing prices and market rents. Although housing prices are stubborn, CPI housing inflation may benefit more from the stability of market rents and continue to improve. 2) In terms of transportation services, the growth rate of automobile insurance costs continues to lag behind the prices of vehicles and labor costs, but this also suggests that there is still room for a decrease in the future. However, the relatively high labor costs may limit the extent to which automobile insurance and transportation service inflation will fall. 3) In terms of energy, the likelihood of a substantial increase in energy prices in 2025 is low, which will have limited overall inflationary effect on CPI. 4) Regarding core goods, the impact of Trump's new policies and tariffs needs to be analyzed. Since 2024, the weight of core goods in the CPI has decreased by about 1 percentage point compared to 2018-19, and by about 2 percentage points in the core CPI. If the tariff policy in 2025 leads to a slight increase in core goods inflation, the impact on CPI and core CPI will still be limited. However, the risk lies in the possibility that the impact of Trump's new term on tariffs may significantly exceed that of the first term, and the actual impact will need to be observed. Risk warning: Trump's expansionary policy measures exceed expectations, Trump's tariff policies exceed expectations, unexpected pressures appear in US and global supply chains, geopolitical risks exceed expectations, etc.