Please see the below article from Evelyn Partners about yesterdays US CPI inflation announcements:
What happened?
US September annual headline CPI inflation rose 3.7% (consensus: 3.6%) and compares to 3.7% in August. In monthly terms, CPI rose 0.4% (consensus: +0.3%), compared to a gain of 0.6% in August.
September annual core inflation (excluding food and energy) rose 4.1% (consensus: +4.1%), versus 4.3% in August. In monthly terms, core CPI rose 0.3% (consensus: +0.3%), compared to a gain of 0.3% in August.
What does it mean?
The ongoing slowing of inflation probably offsets the blow-out jobs report last week for the FOMC to keep interest rates on hold when it next meets on 1 November. Moreover, policymakers are likely to place importance on the recent sharp rise in long-term government yields, which reduces the need for the Fed to tighten further, as the markets have efficiently done their job for them. The FOMC will also be aware about the impact on growth from strikes in the auto sector and a potential US government shutdown from mid-November.
In the CPI details, downward pressure on inflation continues to come from core goods, which decelerated to 0%, its lowest rate since July 2020. This indicates that supply chain disruption from the pandemic has lessened significantly. One way to observe this is through used car prices, which are now falling on an annual basis as production normalises. This puts downward pressure on a past key driver of core CPI inflation from the early stages of Covid from 2020 and the disruption caused by the Russian invasion of Ukraine, as well as the end of China’s stringent Covid-zero rules from last year.
Meanwhile, in the services sector, inflation appears elevated over recent history, but it is nonetheless on a downward trajectory: in September, annual core services (ex energy) inflation came in at 5.7%, down from a peak of 7.3% in February 2023.
Services inflation had been lifted by rents and implied housing costs in the shelter component. However, existing house prices have slowed sharply and, as a lead indicator, point to lower shelter CPI inflation over the coming 12 months.
Bottom Line
Regardless of whether the FOMC (the US Central Bank’s interest-rate setting body) raises interest rates in November or not, the Fed is likely coming to the end of its interest rate hiking cycle. This reduces the risk that the FOMC overtightens on interest rates to creates downward pressure to the economy and financial markets.
While it is a tricky for investors to balance the impact of interest rates and economic growth on markets, the upside case for equities is that the US economy avoids a severe economic hard landing. The downside case for investors is that a rapid rise seen in interest rates could overwhelm consumers and businesses so that spending grinds to a halt. This downside scenario appears less likely, as the consensus of economists surveyed by Bloomberg, expect 1.0% real GDP growth in 2024, after a 2.1% expansion in 2023.
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Andrew Lloyd DipPFS
13/10/2023