SNAPSHOT2 min read

Inflation seals the deal on another jumbo Fed hike

Another inflation surprise, with US CPI rising 0.4% in September, cements the prospect of further aggressive rate rises from the Federal Reserve.

13/10/2022
new-york-us-flags

Authors

George Brown
Senior US Economist

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.

Subscribe to our insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.

Authors

George Brown
Senior US Economist

Topics

Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional investors or advisers only. This site is not suitable for retail clients.

Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority.

For your security, communications may be recorded or monitored.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.