After headline inflation was down in June, rising less than expected, investment managers react on what this means for the economy, investments, exchange rates and potential interest rate rises.

The cost of US goods and services slowed to a two-year low in June, a signal that inflation is continuing to drop as the economy responds to the US Federal Reserve interest rate hikes.

The latest consumer price index figures, which measure the prices of a basket of goods and services, fell to 3 per cent in June, its lowest level since March 2021, though still above the Fed’s target of 2 per cent, meaning that interest rate hikes could come. The drop is largely attributed to the decline in energy prices. Core inflation, which measures prices minus the energy and food sectors, stood at 4.8 per cent in June.

US inflation of 3 per cent contrasts with the latest figures for the UK, for example, showing a rate of 8.7 per cent in May, suggesting that UK rates will rise further, encouraging a rise in the sterling-dollar exchange rate yesterday.

Here are some reactions from investment managers to the US figures.

Alexandra Wilson-Elizondo, deputy CIO of multi asset solutions, Goldman Sachs Asset Management
“The trend that investors have been waiting for is finally here, softer Core CPI prints or hints of pre-Covid normality. The downside surprise on both core and headline numbers allows us to avoid a terminal rate that is gradually scaling up. While it is only one number, this will buy investors time and give them the opportunity to catch their breath. It is enough on a standalone basis for the market to put in question the Fed’s dot projections of two additional hikes left this year and consequently pull interest rate volatility down.

“Yet despite the disinflationary trends, the level of Fed funds rate has only risen to levels comparable to inflation. This contrasts with previous hiking cycles when the Fed hiked rates well above inflation. Therefore, we continue to expect that US monetary policy will stay restrictive for longer, but after this print the Fed very well may be done. All eyes will be on earnings and the health of the consumer from here.”

Daniele Antonucci, co-head of investment and CIO at Quintet Private Bank (parent of Brown Shipley)
“Markets will see today’s US inflation numbers as a sign of relief. Taken together, these figures may reinforce the sense that we might be close to peak rates. A further hike later this month seems like a done deal, especially as the level of core inflation, at 4.8 per cent, remains rather elevated. Further out, another rate rise is possible as the Fed, after all, has indicated in its economic projections.

“But we suspect the central bank is unlikely to tighten monetary policy significantly more. The risk here is that observing the behavior of inflation in real time increases the odds of a scenario of overtightening, triggering an outright recession via tighter credit conditions. This is because interest rate rises take time to feed through. We expect a recession in the quarters ahead, which should contribute to additional inflation moderation and, therefore, put an end to the rate hiking cycle.”

Ryan Brandham, head of global capital markets, North America at Validus Risk Management
“US CPI has been moderating in the US for several months now as the cumulative rate hikes take effect. This release shows inflation slowed even more than expected, which will please the Fed. There is still a high probability priced in for a hike in July as the FOMC nears the end of the hiking cycle."

Daniel Casali, chief investment strategist at Evelyn Partners
“The Fed should take some comfort in the fact that monetary tightening appears to be working to bring down inflation ahead of the FOMC meeting on July 26. Annual headline CPI inflation is heading back toward pre-pandemic rates and core (ex-food/energy) price rises are now below 5 per cent. There are three reasons to expect underlying inflation to slow further from here. First, supply chain disruption from the pandemic has lessened significantly. Second, rental inflation continues to slow. Third, lead indicators point to lower core inflation in the months ahead.

“Regardless of whether the FOMC (the US Central Bank’s interest-rate setting body) raises interest rates or not (current markets’ expectation is for a 25 bps increase), the Fed is likely coming to the end of its interest rate hiking cycle. This reduces the risk that the FOMC will overtighten on interest rates and creates downward pressure to the economy and financial markets. Moreover, as a countercyclical currency, we expect the dollar to depreciate against other major currencies, since the risk of a so-called economic hard landing is reduced. Dollar depreciation should provide additional liquidity, which will help equities to continue their bull run.”

Edward Park, CIO at Brooks Macdonald
“A highly constructive week for US equities looks set to continue as today's US consumer inflation data shows that price pressures are easing over vast swathes of the US economy. Headline and core inflation both missed expectations, declining to 3 per cent and 4.8 per cent respectively. The improvement in supply chains alleviated pressure on goods, while core services have remained relatively stable. The 0.2 per cent month-on-month increase in Core US CPI is the smallest monthly increase in almost two years which will be warmly welcomed by the US Federal Reserve and markets.

"While today's report is undoubtedly a positive sign, the Fed still has a long way to go in achieving its objective of 2 per cent inflation. Jerome Powell essentially telegraphed the bank's intention to raise rates further during his last press conference, and the markets are still taking him at his word, pricing in a 0.25 per cent increase when the upcoming meeting concludes on July 26. With the labor market adding over 200,000 jobs and an increase in hourly wages last month, this scenario appears even more probable.

"With US consumer confidence at its highest level in 18 months and data indicating that the economy grew more than initially projected in the first quarter, many market participants are beginning to question whether the long-anticipated recession will ever materialize. Across the Atlantic, today’s numbers demonstrate that the UK is becoming an ever-greater inflation outlier among G7 countries. With the UK expected to maintain higher interest rates over the coming quarters compared to the US, the GBP/USD exchange rate approached 1.3 in the aftermath of the US CPI report.”

Tom Hopkins, portfolio manager at BRI Wealth Management
“Today’s reading marks a 12th consecutive month of falls and the lowest headline CPI reading since March of 2021. The slowdown is partly due to a high base effect from last year when a surge in energy and food prices pushed the headline inflation rate to record high levels. Falling car prices and a moderation in rent growth also contributed to the falling inflation figure.

‘’The market will likely see today’s reading as a positive as it shows inflation is still coming down. It’s also good news for the Federal Reserve – though likely not enough to keep it from hiking interest rates again later this month, I still expect at least one more rate hike from the Fed.”