- Recent numbers suggest that US inflation is not falling as steadily as markets had hoped
- This has resulted in some market volatility, with more expected in the near term
- However, we do not see a long term impact on investor sentiment
Consumer prices have recently rebounded
Having reached all-time highs earlier last week, US markets wobbled on Tuesday and Friday as news emerged of higher-trending inflation. US consumer prices rose again in January by 0.3 percent over the preceding month, the highest in four months of consecutive rises.
Fig 1: US Consumer Price Index (CPI): percent changes
| October 2023 | November 2023 | December 2023 | January 2024 | 12-months ended Jan 2024 | |
| All items | 0.1 | 0.2 | 0.2 | 0.3 | 3.1 |
| Core (i.e. less food and energy) | 0.2 | 0.3 | 0.3 | 0.4 | 3.9 |
Source: US Bureau of Labour Statistics
The main culprit for these rises was not food or energy or goods, but rather rents. According to the US Bureau for Labour Statistics, the index for shelter (defined as rent prices and what it would cost a homeowner to rent an equivalent residence) rose by 0.6 percent and accounted for over two thirds of the total January CPI increase.
Reversal of decline in wholesale prices
A similar trend was announced on Friday for wholesale prices. The Producer Price Index (PPI) for January rose by 0.3 percent, higher than expected, and following a 0.1 percent decline in December. As with the CPI increase, this uptick was due largely to wholesale services rather than goods, including trade services i.e. the margins received by wholesalers and retailers.
Fig 2: US Final Demand (Producer) Price Index (PPI): percent changes
| October 2023 | November 2023 | December 2023 | January 2024 | 12-months ended Jan 2024 | |
| Total final demand | -0.4 | 0.1 | -0.1 | 0.3 | 0.9 |
| Core (i.e. less food, energy and trade) | 0.1 | 0.1 | 0.2 | 0.6 | 2.6 |
Source: US Bureau of Labour Statistics
Are rate cuts still on track?
Together, these numbers appear to stem from a strong economy and healthy consumer demand. So could they threaten this year’s much-anticipated interest rate cuts? At this stage, most economists do not think so and are still forecasting rate cuts to start in May. Nevertheless markets are more nervous than they were, with some economists concerned that a slow pace of rate cuts could still bring about a recession this year.
UOBAM’s view is that the CPI and PPI adjustment for seasonal factors did not take sufficient account of the price resets that typically take place at the start of the year. Given the high (i.e. above 3 percent) annual inflation, this January’s price reset is likely to have been higher-than-usual.
Furthermore, new rent rises are already below what they were three months ago and rent growth overall is set to fall. In fact, Fed Chair Jerome Powell himself assured the markets back in January that lower rents were on their way saying, “It is just a question of when and how big it’ll be.” Other services-driven inflation should also continue the easing trend that started in mid-2023.
Higher-for-longer
While we think that current inflationary pressures should start to dissipate in the second quarter of the year, our view remains that inflationary pressures will remain a feature of the 2020s. Within this scenario, interest rates will stay on the high side in order to keep such upward pressures in check. As such, we do not expect to see rates return to the near-zero levels seen in the previous decade.
However, this will not necessarily dampen investor sentiment. As long as adequately telegraphed and relatively stable, a higher level of inflation and cost of capital can actually lead to more corporate efficiency, and correspondingly positive markets.
Market broadening
Our research suggests that investors currently have a neutral or higher-than-neutral outlook on equities. Despite recent highs, sentiment does not seem to be overly optimistic, even in the US. However, there is no doubt that much of global market attention to date has been focused on the US and Japan.
Going forward, we expect markets to come to terms with the potential of higher-for-longer rates. This looks likely to result in more muted growth rates in developed markets, and stronger growth rates in developing markets. Higher rates are also more conducive to certain industries and companies than others. There is therefore room for markets to focus on a wider range of opportunities that is driven by sector and company fundamentals.
If you are interested in investment opportunities related to the theme covered in this article, here are some UOB Asset Management Funds to consider:  United Global Quality Growth Fund
 United Asia Fund
You may wish to seek advice from a financial adviser before making a commitment to invest in the above fund(s), and in the event that you choose not to do so, you should consider carefully whether the fund(s) are suitable for you. |
Please refer to uobam.com.sg/awards for the latest list of UOBAM awards.
This publication shall not be copied or disseminated, or relied upon by any person for whatever purpose. The information herein is given on a general basis without obligation and is strictly for information only. This publication is not an offer, solicitation, recommendation or advice to buy or sell any investment product, including any collective investment schemes or shares of companies mentioned within. Although every reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this publication, UOB Asset Management Ltd (“UOBAM”) and its employees shall not be held liable for any error, inaccuracy and/or omission, howsoever caused, or for any decision or action taken based on views expressed or information in this publication. The information contained in this publication, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available and reflects prevailing conditions and our views as of the date of this publication, all of which are subject to change at any time without notice. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product. UOBAM does not warrant the accuracy, adequacy, timeliness or completeness of the information herein for any particular purpose, and expressly disclaims liability for any error, inaccuracy or omission. Any opinion, projection and other forward-looking statement regarding future events or performance of, including but not limited to, countries, markets or companies is not necessarily indicative of, and may differ from actual events or results. Nothing in this publication constitutes accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person. You may wish to seek advice from a professional or an independent financial adviser about the issues discussed herein or before investing in any investment or insurance product. Should you choose not to seek such advice, you should consider carefully whether the investment or insurance product in question is suitable for you..
This advertisement has not been reviewed by the Monetary Authority of Singapore.
UOB Asset Management Ltd. Company Reg. No. 198600120Z
