Inflation in September came in higher than expected with headline prices up 0.4% m/m (consensus 0.2%) and core – ex food and energy – up 0.6%m/m (consensus 0.4%). With such high m/m inflation, it translates the annual headline rate to 8.2% from 8.3% while core rose by 6.6% from 6.3%.

Details of the inflation showed housing prices rose 0.7%m/m, while medical care costs rose 0.8%. Airline fares were up 0.8% while food prices increased 0.8% on the month.

On an easier note, gasoline prices fell by 4.9% m/m, while apparel prices declined 0.3% and used car prices fell for the third month in a row.

We found the basket to be slightly more mixed picture than just looking at the headline and core m/m’s with pricing power appearing to be softening in some components.

75bps Hike in November

With the increase in the annual rate of core inflation, the Fed would continue its aggressive stances at the expense of inflicting the economic pain to get inflation moving back to the 2% target.

With core inflation on the uptrend and at its highest rate since August 1982, plus the recent Fed minutes to the September FOMC meeting warning that doing too little to tame inflation is worse than too much, it confirms our view that a 75bps interest rate hike in November is on the cards. And the call for a 100bps hike is low in our view.

Maintaining a 50bps Hike in December

And we maintain our view that the Fed would slow the pace of its rate hike to 50bps while a call for another 75bps in December is rather low.

We are of the view that the economy is slowing. And there is more evidence pointing to weakening corporate pricing power. More companies who are looking to raise their prices is moderating quickly. This reflects the shifting growth outlook and rising inventory levels.

Source: AmInvest Research - 14 Oct 2022