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US September CPI inflation edges up on energy costs

David Goebel, Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on US September headline CPI inflation:

What happened?

US September headline CPI inflation rose 5.4% from a year ago, marginally higher than consensus expectations of 5.3% and 5.3% in August. Core CPI, which excludes volatile food and energy components rose 4.0%, versus a consensus forecast of 4.0% and 4.0% in July.

What does it mean?

Annual consumer price inflation remained at elevated levels in September. Energy prices continue to be a key driver of inflation in the latest reading, with costs increasing 24.8% year on year, although this does not represent a higher level of growth than the August reading.

Inflationary pressures in motor vehicles remain, where the worldwide shortage of computer chips is having a significant effect on the supply of new cars, the price of which grew at 8.7% year on year. Used car prices, which had been pushed higher from the demand side, now show clear signs of easing and have fallen in price from elevated levels in both August and September.

Shelter prices also increased, growing at 3.2% year on year. Apartment List, a source we follow for insight into US home rental costs, captures more than 5 million properties. In September, it reported that rents continued to accelerate nationally, now up over 15% from a year ago. This suggests that rental inflation has yet to be fully captured in government statistics and given that shelter prices constitute around a third of the CPI basket, could be a source of upward pressure on headline figures over the coming months.

While it is still too early to determine whether the recent uptick in US inflation is transitory or structural, over the last month we have seen rhetoric from Fed members broadly becoming concerned that the risk of ‘stickier’ inflation is increasing. At the virtual European Central Bank event on the 29 September Fed Chair Jerome Powell spoke on a panel alongside other major central bank heads. He talked about the effect of supply chain bottlenecks allied with strong demand contributing to elevated inflation levels, adding that he expected it to continue over the coming months before “moderating as bottlenecks ease”.

At their September meeting, Fed members ‘dot plot’ revealed a 50% chance of a full rate hike by the end of next year. This led the yield on the 10-year treasury bond to increase from around 1.3% to 1.6% over the last month. The narrative that inflation will remain transitory is being tested but remains intact. Economic measures still indicate robust growth which should be conducive to increasing corporate earnings. We still see this macro-backdrop as favourable for equities over long-duration bonds but recognise the risks of increased volatility in financial assets over the coming months as the nature of the current inflationary picture becomes clearer.

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