US consumer prices rose by 0.4% in September, again surprising to the upside. The debate continues, as it has since the start of the year, as to whether higher inflation will prove to be transitory in nature or a more persistent phenomenon. Given the strong performance of inflation-sensitive assets and the weakening performance those more exposed to the macro cycle, investors appear worried about the prospect of stagflation, an undesirable combination of low growth and high inflation. However, most central banks — including the Federal Reserve — continue to see inflationary pressures as transitory and expect them to fade as the bottlenecks in global supply chains clear and the labour market shortages shrink. They may well be right, although Fathom does not expect this to happen imminently. Most likely, inflation will fall back towards target over the next two years, without the need for significant policy tightening.
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