On Wednesday, June 10th, the market faced a more complex macroeconomic mix: US May CPI rose 4.2% year-on-year, the highest level since April 2023, and increased 0.5% month-on-month; core CPI rose 2.9% year-on-year and 0.2% month-on-month. This data is not simply a "rebound in inflation," but rather the result of a simultaneous repricing of energy shocks, transportation costs, food components, and interest rate expectations. Traders have shifted their focus from interest rate cuts this year to whether policy needs to be tightened again, and after verification by publicly available data, this judgment has a sound macroeconomic logic.

Energy shocks are the main theme, but not the only variable.

The core issue behind inflation in May lay in energy. Official data shows that the energy index rose 3.9% month-on-month in May, following a 3.8% increase in April and a significant 10.9% rise in March; the energy component contributed over 60% of the overall monthly CPI increase in May. The gasoline index rose 7.0% month-on-month and 40.5% year-on-year in May, while fuel oil prices rose 58.9% year-on-year. This indicates that inflationary pressures are not stemming from fluctuations in a single consumer good, but rather spreading to a broader price system through travel, logistics, air travel, delivery, and production costs.

The key to oil price transmission lies in its sustainability. The average price of regular gasoline across the U.S. rose to $4.56 per gallon in late May, reaching a four-year high; the official weekly retail gasoline price fell back to $4.146 per gallon on June 8, and another national average price was $4.1510 per gallon on June 10. The price decline from its high helps to ease the month-on-month reading in June, but the current level is still significantly higher than the range at the beginning of the year, meaning that the risk of inflation has not been eliminated; it has simply moved from a "rapid rise" to a "high-level observation" phase.

Core inflation is below concerns, but stickiness has not disappeared.

Most notably, the core CPI rose 0.2% month-on-month, lower than some market expectations, providing some short-term breathing room for the bond market. However, core inflation remained at 2.9% year-on-year, above the 2% target, and structurally challenging. The housing index rose 0.3% month-on-month in May, with landlord-equivalent rents increasing by 0.3% and primary residence rents rising by 0.4%. Airfares rose 2.7%, and communication, personal care, entertainment, and clothing also saw month-on-month increases.

This indicates that the energy shock has not yet fully translated into runaway core inflation, but service prices and some price chains outside of durable goods are already under pressure. More importantly, food prices have not fully cooled down. In May, the food index rose 0.2% month-on-month and 3.1% year-on-year; fruits and vegetables rose 6.1% year-on-year, and non-alcoholic beverages and related materials rose 5.8% year-on-year. For traders, the market will not only look at a lower-than-expected core month-on-month figure, but will assess whether energy costs are reshaping corporate pricing behavior and household inflation expectations.

Employment data compression policy shift space

Inflationary pressures are sensitive because the employment situation has not weakened significantly. Non-farm payrolls increased by 172,000 in May, the unemployment rate remained at 4.3%, and the labor force participation rate was 61.8%. Average hourly earnings rose 0.3% month-on-month and 3.4% year-on-year. Against the backdrop of a 4.2% year-on-year inflation rate, wage growth has not effectively offset consumer purchasing power, but the employment figures still indicate that economic activity has a certain resilience.

This presents the Federal Reserve with a dilemma: if it only looks at the core CPI month-on-month change, policy can remain patient; but if it looks at the combination of energy and employment, the rationale for premature easing has weakened significantly. The April policy statement maintained the federal funds target range at 3.5%-3.75% and emphasized that it would adjust policy according to inflation, employment, and financial conditions. The meeting minutes also showed that most officials believed that if inflation remained above 2%, further tightening of policy might become appropriate.

Asset pricing enters a phase of inflation risk redistribution.

The market reaction was not one-way panic, but rather a repricing. The two-year US Treasury yield fluctuated around 4.11%-4.12%, and the ten-year yield was approximately 4.52%-4.53%. Stock index futures remained weak after the data release, but the decline narrowed. This price action indicates that traders did not interpret the May CPI as an immediate signal of an interest rate hike, nor did they interpret the month-on-month decline in core CPI as a signal of a renewed easing. A more accurate statement is that the market is rewriting the policy path from an "option to cut interest rates" to a "risk of longer-term high interest rates or even tail-end rate hikes."

The pricing factors going forward will not be solely influenced by the CPI reading, but will include three key areas: First, whether the decline in gasoline prices can continue and lower the energy component in June; second, whether food, airfare, housing, and service prices will continue to absorb energy costs; and third, whether the first meeting after the change of Federal Reserve chair will remove any dovish bias and shift towards a more balanced or even tighter stance. If energy prices remain high for an extended period, inflation expectations, term premiums, and risk asset valuations will all face recalibration.