After headline inflation was higher than expected in September, investment managers react to what this means for the economy, investments, exchange rates and potential interest rate rises.

US headline consumer price inflation (CPI) has remained unchanged since August at an annual level of 3.7 per cent in September, compared with expectations of 3.6 per cent, keeping the possibility of a final interest rate hike from the US Federal Reserve.

In monthly terms, the consumer price index rose by 0.4 per cent, compared with a gain of 0.6 per cent in August, data from the US Labor Department shows. The increase in housing was the biggest contributor to the rise. Petrol prices also continued to climb.

September annual core inflation, which strips out food and energy, rose by 4.1 per cent, as expected, versus 4.3 per cent in August. In monthly terms, core CPI rose by 0.3 per cent, as expected, compared with a gain of 0.3 per cent in August, the data shows.

The US central bank is reflecting on whether it still needs to raise interest rates to combat inflation because it is higher than the 2 per cent target.

As wealth management asset allocators wonder how the data might influence central bank action, and hence the attractions of bonds, equities and other sectors, we give reactions below to the data.

Tom Hopkins, portfolio manager at BRI Wealth Management 
“US headline inflation came in at 3.7 per cent, the same figure as last month and marginally missing consensus expectation of 3.6 per cent. Interestingly, US core Inflation has come in at 4.1 per cent year-on-year, the lowest since September 2021 and in line with consensus expectations marking the sixth consecutive month of declines, however, still well above the 2 to 3 per cent target. Given the stickiness of the core inflation figure, it keeps the possibility of one more interest-rate hike by the Fed in play. The last mile that will get inflation to 2 per cent will be tough, especially as labor markets remain tight. This is why the Fed will remain restrictive for quite some time.”

Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management
“It is likely inflation will surprise the Fed to the downside in 2023, boosting the Fed’s confidence that monetary policy has been sufficiently restrictive. Today’s data supports being close to the end of the hiking cycle as the US economy remains on a disinflation path, which has been supported by recent Fed speak and the recent tightening in financial conditions. We view yields as attractive in the front end of the US Treasury curve and continue to find value in high-quality corporate and securitized bonds with short to intermediate durations.”

Daniel Casali, chief investment strategist at UK wealth manager Evelyn Partners
“The ongoing slowdown in core inflation could go some way to counteracting the blow-out jobs report last week if the Federal Open Market Committee (FOMC) is 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 effectively done their job for them. The FOMC will also be aware of the impact on growth from strikes in the auto sector and a potential US government shutdown from mid-November.

“Regardless of whether the FOMC 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 create downward pressure to the economy and financial markets. While it is 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 per cent real GDP growth in 2024, after a 2.1 per cent expansion in 2023.”

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley) 
“The strength of the US job market, along with these inflation numbers, appears to have raised market probability of a further Fed rate hike.This has always been our base. But we also think that we shouldn’t be carried away with the narrative of higher rates for longer. We think we’re close to peak rates. This is because the recent spike in bond yields does tightening financial conditions and, therefore, is likely to substitute for rate hikes. Also, one thing is for bond yields to reprice higher from a low level and in the context of accelerating growth and inflation, as in 2022. In that scenario, investors may think that the fall in bond prices may last for longer. Another is for bond yields to reprice higher for a more elevated level and in the context of decelerating growth and inflation, as currently. In that scenario, the decline in bond prices makes them more attractive.”

Ryan Brandham, head of global capital markets, North America, at Validus Risk Management
“US CPI came in slightly higher than expectations, yet again highlighting the challenges the Fed will face bringing inflation down all the way to the 2 per cent target. Jobless claims saw with another strong print, near nine-month lows, as the labor market remains resilient in the face of rate hikes to date. The labor market softening is key to the Fed achieving its goal of returning inflation to target, and the hawks calling for at least another hike will be supported based on these numbers.”

Jeffrey Cleveland, chief economist at Payden & Rygel
“The Fed wants to see target consistent monthly inflation, which is somewhere around 0.2 per cent. As such, the Fed needs to see a sustained decline in goods prices and a slowdown in services prices. So, it is too soon to declare victory over inflation here, especially when most of what you spend your money on are services. Doesn't mean the Fed hikes in November, but with third quarter GDP having accelerated in Q3, the November 1 meeting should be an interesting debate. For us bond market folks, the big story is the recent rise in longer-term rates. We think the combination of better-than-expected growth, the Fed's higher for longer stance, Powell's quantitative tightening comments at the September press conference, treasury supply, and investor positioning explains the move up in rates in recent weeks/months. Based on this backdrop, the move up in the long end makes sense.”