Inflation data coming in hotter than expected has become a regular feature over the last few months and the latest US PCE (personal consumer expenditure) data continued the trend.

PCE is the Federal Reserve’s preferred inflation gauge and the index advanced by 5.1% year-on-year in September, slightly higher than August’s 4.9% reading.

Core inflation excluding volatile food and energy prices increased 0.5% month-on-month, matching August’s reading and reducing the chance of an immediate pivot away from rate increases. For now investors may have to content themselves with any commentary from the US Federal Reserve which suggests we are at least approaching the peak for monetary tightening.

Meanwhile the decision of Russia to pull out of a Black Sea grain deal could add to global inflationary pressures.

And yet despite the relentless move higher in prices, US 10-year treasury yields fell back below 4% in the last week of October as investors sensed a slowdown in some components of the inflation basket.

As well as lower oil and gas prices, the US property prices notched up a second straight month-on-month decline in August as the rising cost of mortgages crimped demand. Interest rates on mortgages have doubled since the start of the year to 7%.

Investment bank ING is forecasting a 20% decline in US property prices as the cost-of-living crisis, falling stock market and rising mortgage costs squeeze demand.

US property prices have surged more than 40% since the start of the pandemic according to the S&P Case Shiller index. ING reckons the median price for an existing home is higher today than during the housing boom of the mid-2000s.

ING expects falling property prices to feed through to lower rents, albeit with a lag which should act as a drag on inflation. Owner equivalent rent represents around a third of the consumer price index basket.

The prospect of softer property prices is unlikely to sway the Fed which is focused on ‘substantive’ signs that inflation is falling back towards its 2% target before pausing rate hikes.

An important metric for the Fed is the labour market which remains very tight with nearly two vacancies for every unemployed American, and as many as three in some states.

It is likely the Fed will stay the course until the labour market loosens because of the risk that inflation expectations become imbedded, which makes inflation harder to crack.

A brighter piece of news in that regard showed (28 October) a sharp slowdown in private sector wage growth which increased 1.2% in the third quarter compared with 1.6% in the prior quarter.

Meanwhile, the latest University of Michigan inflation expectations survey increased to 2.9% from 2.7% in October. The survey measures where participants expect inflation to be on average in five years’ time.

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