After the US inflation rate increased in August, investment managers discuss the impact and further potential interest rates hikes to fight inflation.

The US Bureau of Labor Statistics reported this week that US headline inflation rose in August to 3.7 per cent, from 3.2 per cent in July, driven by a jump in gasoline prices.

Core inflation, which takes out food and energy components, rose by 0.3 per cent in August, while the annual figure reached 4.3 per cent, versus 4.7 per cent in July. These figures came roughly in line with expectations.

After hitting a peak rate of 9.1 per cent last summer, headline inflation has been moving closer to the Fed’s 2 per cent target. Despite the increase, the US Federal Reserve could still pause the interest rate hike in September. Here are some reactions to the rise from investment managers.

Greg Wilensky, head of US Fixed Income at Janus Henderson Investors
“The biggest driver of the increase was a rebound in airline fares (up 4.9 per cent after dropping by 8.1 per cent in each of the prior two months). A partial rebound was expected given the rising energy prices, but the jump was bigger than expected. While these numbers do not change our, and the market's, expectations that the Fed will hold the target Fed Funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections (SEP). We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike. That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25 per cent of prior hikes to slow the economy and inflation.”

Robert Alster, CIO at Close Brothers Asset Management
“The increase can partly be attributed to rising oil prices. This isn’t a trend we expect to continue, as many oil producing countries have increased output capacity and demand is globally weaker. Despite today’s inflation figure increase, we continue to expect the Fed to hold interest rates steady at its next meeting. Nevertheless, the US finds itself in a moment of uncertainty as activity slows down, particularly across the manufacturing and labor markets. If this trend persists, we anticipate that services inflation will also start to slow. However, it is a chicken-and-egg situation, as a resilient labor market supports consumer spending, which bolsters demand for services and ultimately contributes to employment. We see two key impending factors that may weigh on upcoming data: student loan payments resuming, and pandemic era savings being depleted. Markets are expecting to see interest rates be cut quickly, putting pressure on the Fed. However, as emphasized at the Jackson Hole Symposium, that is not what the Fed’s dot plot is currently indicating.”

Nathaniel Casey, investment strategist at Evelyn Partners, a wealth management and professional services group
“Despite the labor market showing signs of easing, with non-farm payrolls adding less than 200,000 jobs in each of the last three months, persistent wage growth could prove problematic for this goldilocks inflation story. Average hourly earnings continue to remain resilient, gaining 4.3 per cent for the year in August, which remains too high to be consistent with the Fed’s 2 per cent inflation target. With real wage growth in positive territory, this could prompt an increase in consumption, rendering the Fed’s task of bringing inflation back to target more challenging. With two months of reassuring new data under their belts, the Federal Open Market Committee (FOMC) members should feel they have enough evidence of easing inflation and a softening labor market conditions to resist hiking at next week’s monetary policy meeting. However, with the US economy continuing to expand, it is likely the FOMC will be able to keep rates higher for longer, so rate cuts are likely not yet on the horizon.”

Ryan Brandham, head of global capital markets, North America at Validus Risk Management â€śThe results are mostly in line with expectations, except core inflation, which was higher than expected. There has been much data for the Fed to analyze since the July rate announcement, and although there is only a 50-50 chance priced in that there will be another hike this year, if there isn’t, it seems unrealistic to expect inflation to cool to 2 per cent on its own. At this point, further hikes cannot be ruled out. It will be interesting to see if the economy has slowed enough for the FOMC to feel like rates are at a peak.”

Jeffrey Cleveland, chief economist at Payden & Rygel
“Based on the August US Consumer Price Index (CPI) report, we can't rule out additional rate hikes should the 0.3 per cent monthly trend persist. I'm not sure it's enough to tilt the scales for a September hike, but it's too early to say the Fed is done even if they "skip" a hike next week. As for rate cuts? Cuts are not going to be an option if a 0.3 per cent monthly trend persists. This will disappoint those investors looking for the "end of the hiking cycle" and definitely those looking for rate cuts in the next 12 months.”

Christian Scherrmann, US economist at German asset manager DWS
“Recent data already suggest that labor market tightness is (slowly) easing and that economic activity is finally moderating after a strong summer. In addition, policy-relevant core inflation continues to cool (slowly), despite an energy-price driven upside surprise to headline inflation in August. This surprise is unlikely to prompt the Fed to raise rates against expectations next week, but it does highlight the ongoing risk around inflation. If energy prices continue to rise for longer, emerging pressures on core inflation could eventually feed into the Fed's "data-dependent" reaction function going forward. Therefore, central bankers will remain vigilant. Far from declaring victory over inflation, the Fed will most likely keep the well-known hawkish, higher-for-longer guidance in play. We do not expect the Fed to hike further and expect the first downside adjustment in the second quarter of 2024.”