Macroeconomics: US inflation remains resilient, making it difficult for the Fed to initiate rate cuts

[Market Information]

The US appeals court has suspended the adverse ruling on Trump’s 10% global tariff.

Iran situation.

US Defense Secretary: The ceasefire agreement with Iran remains valid; there are plans in place to escalate the situation with Iran if necessary.

“Fury” could turn into “Heavy Hammer,” as the US considers renaming operations to circumvent war authorization time limits.

Sources indicate that Iraq and Pakistan have reached agreements with Iran, allowing them to transport oil and liquefied natural gas from the Gulf region.

Iran: The precondition for negotiations with the US is the end of hostilities and the lifting of the blockade in the Strait.

The UK will dispatch fighter jets and warships to the multi-national escort operation in the Strait of Hormuz.

Trump: Financial conditions of Americans were not considered when contemplating the Iran deal. Iran: If the US acts again, Iran may enrich uranium up to 90%.

3) US CPI rose 3.8% year-on-year in April, exceeding market expectations of 3.7%, reaching a new high since May 2023; core CPI rose 2.8% year-on-year, surpassing expectations of 2.7%, and hitting a new high since September 2025.

4) The US Senate confirmed Kevin Warsh as a Federal Reserve governor for a 14-year term. This is seen as an important step towards becoming the next Federal Reserve Chair. The Senate will then initiate the confirmation process for Warsh's appointment as Fed Chair, with voting potentially completed as early as May 13. Powell’s term as Fed Chair will conclude on May 15.

5) The minutes from the Bank of Japan’s April meeting showed that several policy members advocated for an early interest rate hike, with one member explicitly stating the possibility of a rate increase in June. At the April meeting, the BOJ kept rates unchanged at 0.75% but significantly raised its inflation forecast.

[Nanhua Perspective] US April CPI data showed a year-on-year increase of 3.8%, reaching a phase high since May 2023. This inflation data, combined with domestic price data released the previous day, highlights the synchronized global macroeconomic imported inflation. Influenced by energy geopolitical conflicts and industrial cycle factors, the evolution of inflation has become the core variable guiding global monetary policy direction and driving fluctuations in various asset prices. The performance of US inflation in April was essentially the result of both base effects and geopolitical impulses, which the market had already priced in advance, thus not causing much systemic panic. On one hand, the reciprocal tariff policies implemented by the US have significantly lowered the base of import prices during the same period, forming a natural upward carryover effect for inflation in the first half of this year. On the other hand, the recent escalation of US-Iran tensions has caused disruptions in shipping through the Strait of Hormuz, leading to a continuous rise in international oil prices since March, which became the most direct driver of this inflationary trend.

Looking ahead, US inflation will likely remain within the 3.5%-4% range, but once geopolitical tensions ease, the strait resumes navigation, and the low base effect gradually dissipates in Q3, inflation could potentially retreat. On the policy front, current federal funds rate futures have fully priced in the expectation that the Fed will not cut rates in 2026, but vigilance is needed against market overcorrections. Domestically, April price data continued the 'strong PPI, weak CPI' divergence, with its core contradiction highly linked to global inflation transmission. We believe this unexpected rise in PPI is the result of a combination of global supply shocks, industrial cycles, and statistical lags. Specifically, the transmission effect of a higher international oil price center in March-April was concentrated, with the four major industries of oil extraction, processing, and chemicals collectively pushing PPI up by 1.5 percentage points month-over-month, becoming the most critical driver. Meanwhile, the global AI computing power investment boom has created a new structural price increase theme, with upstream product prices such as optical fibers and semiconductor materials rising sharply month-over-month, driving sustained increases in electronic equipment manufacturing prices. The mild recovery in CPI mainly relied on lagged transmission of energy prices and concentrated release of travel demand during the May Day holiday, while excluding energy industrial consumer goods prices are still falling, indicating limited core CPI growth, reflecting that terminal consumer demand remains in a moderate recovery phase, without signs of comprehensive warming. Further, the positive reversal and rapid expansion of the PPI-CPI scissors gap has become the core issue constraining corporate profitability and economic recovery momentum. A significant rise in upstream raw material prices coupled with weak downstream demand prevents costs from being smoothly passed down, resulting in dual pressures of cost pressure and revenue weakness for mid-to-downstream manufacturers, especially small and medium-sized enterprises. If the scissors gap continues to widen, it will further suppress companies’ willingness to expand production.

However, it should also be noted that upstream cost premiums are gradually being transmitted to high-performing sectors such as technology manufacturing and high-end equipment, providing important support for profit improvement in related industries. In response to the complex internal and external environment, the central bank’s Q1 monetary policy implementation report established a “supportive overall volume, structural emphasis” policy tone. At the aggregate level, M2 and total social financing growth rates are both higher than nominal GDP, maintaining ample market liquidity, but commercial banks’ net interest margins are at historical lows, limiting room for aggregate interest rate cuts.

In this context, structural monetary policy tools have become the core policy focus. Instruments like relending for technological innovation and special relending for equipment upgrades will continue to play a role, providing moderate support for reasonable price recovery while guiding funds to flow precisely into new productivity areas. Looking forward, the second quarter of global macroeconomics will enter a critical window period of 'high inflation volatility, policy expectation games.' On the inflation front, the domestic situation will continue the pattern of 'rising PPI, mild CPI,' with key attention needed on developments in the Strait of Hormuz, the pace of upstream cost transmission, and the stabilization timing of pork prices.

Author: Assistant Director of Nan Hua Research Institute, Zhou Ji Z0017101

Important Disclaimer: The content and opinions in this article are for learning and reference purposes only and do not constitute any investment advice. The market carries risks, and investments should be made with caution.

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