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Investors suggest inflation peak as US CPI breaks five-month streak

Excluding food and energy, core CPI printed 4.3% year-on year for July, in line with expectations but lower than the previous print of 4.5%.

US inflation surpasses expectations in largest uptick since 2008

Seema Shah, chief strategist at Principal Global Investors, suggested the figures should “help assuage investor fears that the Fed is too laid back about inflation pressures” but markets should not consider inflation passed.

“While the data should reassure markets that inflation isn’t on a relentless upward trend, make no mistake – this inflation report is still hot,” she said.

Tilney Smith & Williamson investment strategist Sam Pham agreed that it was too early for either hawks or doves to claim victory, with 60% of CPI categories rising above 3% year-on-year.

“This momentum slowdown could confirm the Fed’s view that the recent spike is transitory, although we maintain that it is too early for either side of this inflation debate to claim victorious,” Pham explained.

Covid remains front and centre of the reasons for the increased consumer prices over recent months, as Tom Kremer, senior fund manager at Quintet Private Bank explained: “US consumer prices rose at a more moderate pace in July, up 0.5% from June, with the core measure coming in somewhat lower than expected at 0.3% month-on-month.

“As in previous months, the majority of the increase can be ascribed to Covid-sensitive goods and services, which still face a range of supply disruptions and bottlenecks.”

He added that while consumers are “less price sensitive for the moment”, this will not last and as “excess savings” dwindle, retailers will have to bear more of the input costs.

However, he added the report presents signs of normalisation, from which the Federal Reserve should take “further confidence in the transitory nature of inflation”.

BoE holds rates at 0.1% but warns of further ‘temporary’ inflationary pressure

Ambrose Crofton, global market strategist at JP Morgan Asset Management, also pointed to the easing of covid-related bottlenecks to explain the transitory argument.

“With 60% of the annual inflation figure coming from just a fifth of the inflation basket including restaurants, energy, used cars and transport – this lends credence to the argument that much of the pickup in prices will prove temporary,” he said.

However, he added that some inflationary factors are more permanent and could continue to build.

“While a good amount of inflation can be attributed to these temporary factors, there are signs that underlying price pressures that could prove more persistent continue to build. The shelter component that tends to move in long cycles and accounts for a third of the inflation basket rose to 2.8% year on year,” Crofton explained.

Given the inflation figures of recent months, Mike Owens, global sales trader at Saxo Markets, was almost surprised to see numbers come out in line with expectations.

“It certainly appears that the market was set up for a beat as we are seeing USD on the backfoot and bond yields fall back since the figures came out,” he said. “We have had a predictably positive reaction from equity futures with growth and value stocks both taking something from the numbers, and the debate over whether this current bout of inflation is transitory will continue.”

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