The US February CPI data will be released this Wednesday, and the market consensus expects that inflation may decline slightly.

However, even if the data meets expectations (overall CPI +0.3% MoM, core +0.3%), the annualized inflation rate will still be as high as 3.9%, nearly double the Fed's target, and far from an optimistic moment.

We need to see a MoM decline to 0.2% or lower for the market to feel comfortable going long, but we need to be wary of data noise (such as energy price fluctuations); if the actual data is unfortunately higher than expected, the market may experience another plunge.

Secondly, we need to pay attention to the lagging impact of tariffs:

• In early February, the US imposed a 10% tariff on Chinese imported goods, involving furniture (32% of imports), apparel (26%), and electronics (21%).
• This caused the core goods inflation (excluding used cars) to rebound to 0.2% in February (from -0.1% in January), with the most obvious impact on education-related goods, with prices rising 2.8% MoM (only 0.1% in January); some companies may have stocked up in advance, leading to short-term price fluctuations, but this is not sustainable.

The future risk is that import data is usually lagged by 1-2 months, so even if this data does not reflect the relevant impact, the CPI in March-April is also likely to face a second shock.

Because the average shipping time from China to the US is 25-35 days, goods shipped after February 1 will not arrive at the port until early March; then it takes 1-2 weeks to complete customs clearance, and the new tariff costs will start to be included in the wholesale costs in mid-to-late March; US retailers are currently selling inventory from Q4 2023 (without tariff costs), and the new tariff-imposed goods will not enter end-user sales until April.

So March-April CPI is the real test

1. Household goods: wholesale costs will rise in March, and retail may adjust prices in April-May (estimated MoM +0.3%-0.5%);

2. Apparel: spring apparel costs up 5%-8%, April CPI apparel sub-index may turn positive MoM;

3. Consumer electronics: phones, computer accessories to rise 3%-5% in price starting March (e.g. Anker chargers have announced a price increase in April).

Historical reference: Lessons from the 2018 trade war

In July 2018, the US imposed a 25% tariff on $34 billion of Chinese goods, and the impact of tariffs on CPI typically reaches its maximum value 2 quarters after the policy takes effect.

• CPI increase lagged by 3 months: apparel CPI jumped 0.5% MoM in October 2018 (prior 0.1%);
• Peak lagged by 6 months: household goods CPI rose to 3.2% YoY in January 2019 (pre-tariff 1.5%).

So if the market only focuses on the February data and thinks "the worst is over", this may sow the seeds of misjudgment; the main reason for this is that the recent rapid decline in bond yields has diluted inflation expectations, and the expectation of rate cuts is still around 2%, so the market has somewhat priced in the generally benign inflation data this time. Assuming the data meets expectations and the interest rate market's rate cut expectations remain unchanged, the market may have underestimated the risk of a rebound in inflation.

If the core goods inflation rebounds to above 0.4% in March (high probability), it may trigger the Fed to re-evaluate the conclusion that "inflation is under control", and the 2025 rate cut expectation may disappear completely.

In addition, the previously released January non-farm payroll wage growth of +4.3% YoY and the persistently high labor costs in the service sector may also force price hikes, which could trigger a wage-inflation spiral risk, in addition to the tariff impact.

High-frequency data to track:

1. US Import Price Index (released on March 15): directly reflects tariff costs;

2. Retail earnings calls (e.g. Walmart, Best Buy in April): pay attention to management's comments on price increases.