Steady rise in ‘sticky’ US inflation categories

Inflation forecasting in the United States has struggled to accurately project ‘transitory’ inflation drivers as they continue to subside and resurface, after the latest US Consumer Price Index (CPI) report revealed highest inflation levels since the early nineties.

 Scott Ruesterholz, Portfolio Manager at Insight Investment, said the report’s results were another surprise with headline inflation at 6.2% and core inflation at 4.6%, but the key focus should be the modest but steady rise in ‘sticky’ inflation categories.

He urged investors to focus on ‘sticky’ sectors like rents, as steady rises in these categories can jeopardise the Federal Reserve’s (Fed) expected ‘transitory’ inflation trajectory more than supply chain issues.

“Over time, rents have proven to be the best indicator of inflation, explaining two-thirds of the movements in core US CPI, while generally printing at a rate ~1% faster,” Ruesterholz said.

“If rents accelerated to 4% for a sustained period, that would be a clear warning sign that the Fed faces a more serious inflation problem. If rents settle in the low 3% zone (as it did pre-COVID), the Fed is unlikely to be worried.”

Ruesterholz also identified healthcare as another sector subject to inflation impacts, after it rose 0.5% – but 1.7% year-on-year – as insurance premiums jumped 2%.

Ruesterholz said US energy prices surging 4.8% have driven the latest inflation beat, after natural gas and oil shortages in Europe pushed up global demand.

“There is light at the end of the tunnel, however,” he said. “Futures curves are currently pricing in falling energy prices over the next six months on expectations that production will rise, although of course this remains to be seen.”

Ruesterholz also said supply chain issues are showing some signs of easing in impacted consumers sectors, after recent communication from auto manufacturers including GM, Ford and Toyota signalled plans to increase production this quarter.

Amy Clements, Investment Specialist, Australia and New Zealand at Insight Investment, said some of these inflationary impacts have also been reflected in the Australian market.

“The disruptions to economies, labour markets, and supply chains wrought by COVID-19 has been momentous and perhaps unsurprisingly, inflationary,” she said.

“While markets grapple with the ‘stickiness’ of inflation; investors search for ways to shore up portfolios from its potentially devastating effects.”

Ruesterholz and Clements also said investors have their eyes firmly fixed on inflation and the next moves of central banks, with US investors viewing a 6% inflation print as a clear signal for the Fed to shift gears and Australian investors waiting for inflation to test dovish central bank rhetoric.