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Key takeaways

  • Inflation has increased by 0.4% in September, taking the annual rate to 8.2%.
  • Stock markets have sunk on the news, with further interest rate hikes now all but guaranteed.
  • Real wages fell in September and have now dropped by 3% over the past 12 months
  • It’s a difficult environment for investors, but there are still opportunities to generate profits.

Early this morning the US Bureau of Labor Statistics announced the inflation figures for the month of September. The headline rate was up 0.4% for the month, which brings the rate for the last 12 months down ever so slightly from 8.3% to 8.2%.

The announcement came as a surprise to some analysts who had been expecting a more significant impact from the Fed’s numerous interest rate hikes. It almost guarantees that there will be further hikes at the coming Fed meetings, with chairman Jerome Powell making multiple statements on their priority of bringing the number down.

Core inflation, which removes the volatile food and energy prices from the equation, was up as well. It increased 0.6% for the month of September, which puts the annual rate of increase at 6.6%.

The headline rate is down from the 9% annual rate of inflation that was hit at its peak, but the number is remaining stubbornly high. It is particularly concerning for households who are now needing to contend with rising costs for things like credit cards and mortgages, at a time when other prices remain high as well.

The 0.4% increase in the headline rate was higher than the 0.3% Dow Jones estimate, as was the 0.6% core CPI rate which had been expected to grow by 0.4%.

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How markets responded to the latest CPI numbers

Markets responded emphatically to the news and dropped over 2% in early trading on Thursday. The Fed’s interest rate policy has been weighing on markets in recent months, with increasing rates expected to reduce consumer spending.

That’s not good news for companies like Nike
NKE
or Apple
AAPL
who rely on households having some cash in their pocket to buy their products.

With the release of these latest figures almost certain the Fed chairman Jerome Powell and his colleagues will vote to raise rates at the next meeting, with an increase of a further 0.75 percentage already priced in.

There has been a lot of tough talk from Powell on their plan to get inflation back down to the target range of between 2-3%, so it’s not beyond the realms of possibility that we see a super rate hike of up to 1.00 percentage point.

That would likely have a major impact on markets, but it may be necessary in order to curb the rate of rising prices. At this stage this is all speculation, with the next meeting of the Fed scheduled for November 1st & 2nd.

It wasn’t just stock markets that were spooked by the release.

US Treasury prices fell as yields increased, with traders expecting an even more aggressive approach from the Fed over coming months. Increasing yields may seem like a positive, but as interest rates rise it makes bonds which have already been issued need to fall in price to match the new (higher) interest rates.

This movement doesn’t change the fundamental level of risk within a US Treasury or any other bond, but it can result in significant falls in price over the short term. It’s the reason we’ve seen such an unusual amount of volatility in the bond markets, which usually trundle along sending investors to sleep.

The inflation figures in detail

As always the details on the inflation figures were a mixed bag. Food prices were up significantly, increasing by 0.8% in September to bring the total rise over the past 12 months to 11.2%.

One notable outlier was the prices for food at employee sites and schools, which rocketed 44.9% in September alone. This was reflective of free school lunch programs which have now expired.

Energy prices actually went down by -2.1% in September, though the overall increase over the past year still sits at an eye-watering 19.8%. New vehicles rose again by 0.7% in September, though a slowly increasing level of supply allowed used car prices to drop -1.1%.

The other big movers were piped gas which was up another 2.9% in September to bring the 12 month figure to 33.1% and transportation services which was up 1.9% and 14.6% for the year.

Gasoline continued to fall from its crazy highs of a few months ago, with the price dropping -4.9% over September.

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Wages drop in the month of September

At the same time as costs continued to go up, real wages continued a downward trend dropping by 0.1% in September.

This is a figure that takes into account rising prices to assess the tangible increase to a worker’s take home pay. The headline rate for wages actually increased by 0.3% over September, however given that prices rose by 0.4% it means that the average worker is still likely to be worse off.

This means that over the course of the past 12 months, real wages have fallen 3%. To put this into context, with inflation over the past year now at 8.2%, wages have nominally increased by 5.2%.

A 5%+ increase in pay doesn’t look too bad, but once it’s taken into account with the increase in the cost of living, it means that workers are still likely to be under greater financial strain than they were 12 months ago.

What does this mean for investors?

With every release of new economic data it’s becoming clearer that there isn’t likely to be a quick simple end to the current situation. Inflation remains stubbornly high despite the significant steps already taken by the Fed, and the expectation is that they will have to double down on their efforts to bring down prices.

Continuing to increase rates is going to put further strain on households, and by extension, the wider economy.

This is the reason for the reaction from markets today, with concerns that reduced consumer spending will put pressure on companies aiming to protect their bottom line. All in all, it means that the volatility in stock markets and the difficult economic environment is likely to extend into 2023.

So against that backdrop, what are investors to do?

Luckily, there are always options. At Q.ai we provide a range of different Investment Kits that not only seek protection from challenging financial environments, but potentially also profit from them.

If your main concern is continued high levels of inflation, we have the Inflation Kit. This is a diversified portfolio of assets designed to help mitigate the impact of inflation, and we use the power of AI to predict and adjust the positions between these assets automatically each week.

This Kit is made up of Treasury Inflation Protected Securities (TIPS), gold and other precious metals, as well as a basket of commodities including agricultural products and oil futures.

For investors who want to stick to the stock market, the Large Cap Kit is worth a look. During periods of low or negative economic growth, big companies tend to outperform small and mid-sized ones.

They have more cash in the bank, more stable revenues and less reliance on growth to keep the shareholders happy. The Large Cap Kit aims to take advantage of this potential gap in valuations, by taking a long position in large cap stocks while at the same time shorting small and mid caps.

It means that investors profit from the differential between the two, rather than outright performance. Even if the overall market goes sideways or even down, returns can be found if large caps hold up better than small and mid caps.

It’s a type of sophisticated pair trade that’s usually reserved for big baller hedge fund clients, but we’ve made it available for everyone.

Lastly, we also offer Portfolio Protection for all of our Foundation Kits. This harnesses the AI to automatically implement sophisticated hedging strategies every week, with the aim to reduce volatility and overall risk for your portfolio.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.

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