Us CPI rose 8.6 per cent in May from a year earlier, a record high, while core CPI rose 6 per cent year-on-year, also higher than expected. Itemized, prices are rising for almost all important items, indicating that inflation can be strong, and if CPI continues to rise at its current month-on-month growth rate in June, inflation will be even higher.

We thinkRecord inflation poses a major challenge for the Fed, which may require more aggressive monetary tightening if it is to be controlled, while tighter money will increase downward pressure on the economy and increase the probability of recession.One possibility is that the Fed will have to reproduce the Volcker moment at the cost of a recession (a "hard landing") in exchange for price stability. This also means that the adjustment of overseas capital markets is not over, and the double killing of stocks and bonds is still the main theme.

First of all, CPI inflation in May was a "general rise", with prices of food, energy, core goods and core services rising across the board.

On the food front, affected by the sharp rise in global food prices, food prices continued to rise, rising further to 1.2% in May after a month-on-month increase of 0.9%. The food items with the highest month-on-month growth included dairy products (2.9%), eggs (5%), rice (2.6%) and so on.

On the energy front, retail gasoline prices have jumped sharply since May, driven by rising oil prices, with gasoline prices in CPI rising 4.1 per cent month-on-month. The prices of fuel (16.9%) and natural gas (8%) also rose sharply. Retail gasoline prices have continued to climb since June, with the latest figures showing that gasoline prices reached $4.98 a gallon in the first week of June, up from $4.73 a gallon at the end of May. If gasoline prices continue to rise for the rest of June, we expect energy CPI inflation to be even higher in June.

In terms of core commodities, the prices of travel commodities are still resilient, while the prices of household commodities have cooled somewhat. The prices of new cars (1%) and used cars (1.8%), which contributed greatly to inflation in the previous period, are strong, while the prices of clothing (0.7%) continue to rise. In contrast, the prices of furniture and bedding (- 0.2%), household appliances (- 0.7%), computers (- 1.4%) and smartphones (- 5%) have fallen, indicating that consumer demand for these goods has cooled.

In terms of core services, the month-on-month growth rate of rent rose to 0.6%, of which landlord equivalent rent (0.6%) and main home rent (0.6%) maintained a high month-on-month increase. Rent accounts for 32% of the weight in the US CPI basket and is highly sticky. if the monthly growth rate can be maintained at about 0.5% in the future, it will provide continuous support for the price of core services. In addition, ticket prices rose 12.6% month-on-month, indicating strong demand for summer travel. As wages rise, the prices of some labor-intensive services such as family services (2.1 per cent), medical services (0.4 per cent) and entertainment services (0.5 per cent) have gone up. Given the resilience of rent and wage inflation, we expect core services to be the most important factor supporting the rise in US inflation in the future.

In our previous in-depth report, "US inflation, what happens after the inflection point?"it is pointed out that the persistence of this round of US inflation should not be underestimated. Looking ahead, assuming that US CPI growth remains at the May level in June, CPI growth will rise further to 8.7 per cent year-on-year in June, higher than in May, while core CPI will remain at 5.8 per cent.

Record inflation poses pressure and challenges for the Fed, which may need more aggressive monetary tightening if it wants to control inflation. Since June 1, the Federal Reserve has entered the state of synchronously advancing the "contraction table" of raising interest rates. In terms of raising interest rates, we had expected the Federal Reserve to raise interest rates by 50 basis points each in June and July. With the release of inflation data in May, we expect the Fed to give a more aggressive path to raise interest rates. Although there is still a high probability of raising interest rates by 50 basis points in June, we do not rule out the possibility of raising interest rates by 75 basis points in July and another 50 basis points in September, thus creating a situation of consecutive "back-to-back" interest rate hikes in May, June, July and September. In terms of "shrinking tables", the Federal Reserve may further consider taking the initiative to sell MBS. The move will accelerate the contraction of US money, thereby helping to curb demand and control inflation.

An increase in monetary tightening means that the US economy is under more downward pressure. In our report "cyclical inflection points, dangerous shoals", we pointed out that as the US monetary tightening enters the "deep water zone" in the second half of the year, the biggest challenge facing the US economy is the fear of economic slowdown or even recession. Now that inflation is again at a record high, the Fed may be forced to tighten monetary policy more aggressively, and economic growth will pay a higher price.

One possibility is for the Fed to reproduce the Volcker moment at the cost of a recession (a "hard landing") in exchange for price stability. In the early 1980s, in order to curb excessive inflation, Volcker, then chairman of the Federal Reserve, at the expense of short-term economic growth, the US economy fell into recession in 1980 and 1981, in exchange for the end of the era of high inflation. In hindsight, Volcker's success lies in his determination to curb inflation and the correct understanding that monetary overissue is the root cause of high inflation. If Mr Powell is to rein in inflation now, he may need to follow Mr Volcker's example and be more aggressive in monetary tightening.

Us stocks fell sharply after the release of the inflation data, with 10-year Treasury yields exceeding 3.1 per cent. 5-year and 30-year yields were upside down, indicating market concern about the economic outlook. The upside-down of interest rates on US Treasuries is often seen as a leading indicator of a recession, and although the market is divided over which maturity to use, it will increase concerns about the economic outlook and dampen investors' risk appetite. We believe that, from this point of view, the adjustment of overseas capital markets is not yet over, and the double decline in stocks and bonds is still the main theme. In addition, the University of Michigan consumer confidence index (preliminary) released on Friday fell to 50.2 in May, the lowest since 1980, indicating that consumer aversion to inflation is already strong. We believe that negative consumer sentiment not only affects their consumer behavior, but may also reduce the chances of the Democratic Party winning the mid-term elections in the second half of the year.