12 July 2023
If you are covering the latest US inflation data, please find below a comment from CJ Cowan, portfolio manager at Quilter Investors:
“The US has seen a substantial fall in its inflation rate and today marks the first sub-4% reading of headline CPI since March 2021, edging it ever closer back to target. More significantly, core inflation came in at 4.8% y/y and below expectations, triggering a Treasury market rally and some yield curve steepening.
“While the Federal Reserve paused in June, it still indicated that it sees two further hikes later in the year. The market priced an 80% chance of the first of those being delivered in July prior to the inflation data and the initial reaction to today’s data still suggests that remains the most likely outcome of the Fed’s meeting in a couple of weeks’ time.
“As favourable base effects start to roll off later in the summer, there is some concern that inflation will bottom out above the Fed’s 2% target. However, survey data of long-term inflation expectations remain fairly well behaved, albeit a little higher than pre-pandemic averages, and inflation markets still price a swift return to target.
“While this may prove to be a little optimistic, on balance we think we are far from seeing the full effects of the rate hikes that have already been delivered. Remember the Fed only started hiking in March 2022 (16 months ago), so it will take some time for policy to fully transmit to the economy. Meanwhile, if the Fed are genuinely committed to tackling inflation then those expecting interest rate cuts in short order may be disappointed as learnings from the 1970s suggest that easing policy prematurely can result in inflation re-emerging.”
