Snapshot

Inflation seals the deal on another jumbo Fed hike


Markets have moved to price in more rate hikes from the Federal Reserve (Fed) after US inflation surprised yet-again to the upside. Headline CPI advanced 0.4% over the month of September, surpassing expectations for another 0.2% increase. And the core measure, which excludes food and energy prices, saw a repeat rise of 0.6%. Economists had expected it to increase by 0.5%.

Price increases were broad-based across the basket. Among the biggest upward contributors was owners’ equivalent rent, which accounts for one-quarter of the overall index. This rose by 0.8%, the largest monthly increase since June 1990. Also pushing up on the index was food, which witnessed another 0.8% rise over the month.

A 2.1% drop in the energy component was one of the few subtractors, dragged down by a 4.9% decline in gasoline prices.

Another robust rise in CPI is cause for concern. Assuming the pace of core inflation were maintained for a full year, it would see a cumulative rise of 7.4%. But even more worrying is the breadth of inflation. By our estimates, some two-thirds of the core basket is 6% higher than a year ago. And with the labour market remaining tight despite some evidence of cooling, there is a material risk of second-round effects on wages and prices.

Faced with this, the Fed has little choice but to continue to aggressively raise rates. Investors are now fully pricing in a fourth consecutive 75 basis point hike next month. And futures markets imply a 1 in 10 chance of an unprecedented 100 basis point increase. Given the scale of this policy tightening, we find it difficult to see how the US economy will avoid a hard landing.


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This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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