Inflationary pressures have eased beyond market expectations in the United States, with the latest consumer price index (CPI) rising just 0.4 per cent in September, down from 0.6 per cent in August.
Inflation has eased to just 3.7 per cent in annualised terms after hitting a peak of 9.1 per cent in June 2022.
At the same time, the US economy remains resilient, as affirmed by an upside surprise in the latest GDP data.
The US economy grew 4.9 per cent in the 12 months to 30 September – the fastest growth since the fourth quarter of 2021 and well above market forecasts of 4.3 per cent.
These latest prints have rekindled hopes for a soft landing for the US economy, despite an aggressive monetary policy tightening cycle involving 400 bps in cumulative hikes to the funds rate.
Over the past few weeks, Federal Reserve officials have hinted at an end to the tightening cycle, but the door was left open by chair Jerome Powell.
Faster-than-expected disinflation and stronger-than-expected GDP growth is expected to support the case for a hold to the funds rate at the next Federal Open Market Committee meeting on 31 October.
But according to James Knightley, chief international economist at ING Economics, it’s not all good news for the US.
He said the economy has likely peaked and would begin to experience the effects of a protracted battle against inflation, particularly as the supply of credit weakens.
“Unfortunately, we don’t see this stellar growth rate being repeated in the fourth quarter of the year,” he said.
“The cumulative effects of Federal Reserve interest rate increases and reduced credit availability are showing signs of finally biting.”
Mr Knightley noted credit card costs were the highest on record, while at the same time, sources of income are “looking less supportive”.
“Real household disposable income is flat lining, savings are being run down and consumer credit is starting to be paid back, with student loan repayments restarting,” he said.
“As such, we expect consumer spending to grow at a weaker pace in the fourth quarter with this decelerating trend continuing in 2024.”
Mr Knightley said he expects GDP growth to ease to 1.5 per cent over the final quarter of 2023.
“Not terrible, but with those challenges facing the consumer sector likely intensifying, growth is set to be even weaker in 2024,” he said.
Despite the surge in GDP and the easing of inflationary pressures over the third quarter, the US share market continued to underperform, with the Dow Jones Index falling by a further 0.76 per cent.
After a strong start to the year, the index is down just over 1 per cent in the year-to-date.
