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Inflation, interest rates, and the value of knowing what you own
Central bankers could be forgiven for wanting a quiet week. Instead, America's latest inflation figures have reopened the question of another Federal Reserve rate increase, while Australia's employment numbers suggest the RBA's tightening is gaining traction. Meanwhile, ASIC has delivered a reminder that investors have another uncertainty to consider: How reliably some of their investments are valued.
Start with the United States, where September's consumer prices rose 0.6%, taking annual inflation from 3.4% to 3.7%. Energy prices increased 5.2% in the month, with petrol jumping 9.1% and accounting for more than half the overall monthly increase. Whatever reassurance falling inflation had previously offered households, it was becoming harder to find at the bowser.
The more uncomfortable detail for the Fed was underneath the headline. Core prices, excluding food and energy, rose 0.3%, against economists' expectations of 0.2%. Annual core inflation increased from 2.4% to 2.6%. Energy led the acceleration, but broader price pressures gave additional reason for concern.
Having unanimously increased its target range to 3.75-4.00% in September, the Fed faces the possibility of a second consecutive increase when it meets in the last week of October. Another quarter point would take the range to 4.00-4.25%. That remains a possibility rather than a settled outcome. San Francisco Fed President Mary Daly has indicated that further tightening will probably be necessary, while arguing that the Fed has time to consider the evidence before acting again.
The dilemma is familiar. Higher interest rates cannot repair damaged energy infrastructure, reopen shipping routes or produce another barrel of oil. They can restrain spending and reduce businesses' ability to pass higher costs on to customers. The danger of waiting is that an energy shock becomes embedded in wider prices and inflation expectations. The danger of acting is that households, already paying more for fuel, face another squeeze through borrowing costs.
With the US midterm elections approaching, that is an awkward combination for the White House. Voters experience the price of petrol immediately; monetary policy's benefits take considerably longer to arrive. The Donald's rhetoric (to put it in polite terms) is wearing thinner and thinner as he becomes more and more rattled over the outcome of the mid-term elections which are rushing up on him.
Australia's version of the inflation problem came into sharper focus with Tuesday's release of the RBA's September meeting minutes. Members judged that excess demand was greater than previously assessed and that several inflation risks had materialised or were building. These included higher energy costs, AI-related demand and persistent domestic capacity pressures. The Board also questioned how restrictive interest rates really were if the underlying neutral rate had risen.
Then Thursday's labour figures added a complication. Employment fell by 39,000, unemployment reached 4.7%, and participation declined to 66.8%. However, hours worked increased slightly and trend unemployment remained at 4.6%. The ABS also cautioned that survey changes could retain some influence on the monthly figures. Evidence of cooling deserves attention; one release does not resolve the inflation debate.
For investors, the uncomfortable possibility is slower growth alongside stubborn inflation. That can pressure company earnings while limiting the RBA's room to reduce interest rates.
The IMF's latest World Economic Outlook describes a similar global tension. It forecasts growth of 3.1% this year and 3.4% in 2027, with energy disruption weighing on activity while AI investment supports demand. Both can add to inflation. Its warning about depleted fiscal buffers also matters: governments facing higher debt servicing costs have less room to cushion the next shock. These are forecasts, with considerable uncertainty attached.
The IMF's accompanying financial stability report examines what could upset apparently resilient markets: an AI-related correction, sharply higher sovereign bond yields or a serious cyber event. For fund investors, those scenarios raise practical questions about concentration, borrowing and access to cash when several markets come under pressure together.
Which brings us to ASIC's latest review of superannuation financial reporting and audits. Across 42 financial reports and six audits, ASIC found continuing weaknesses in the scrutiny of unlisted investment valuations. Some trustees relied heavily on external managers' prices; some auditors did not adequately test the assumptions behind them. These findings do not establish that every investment reviewed was incorrectly valued. They do establish that the checks need strengthening.
That matters when comparing fund performance and risk. Listed assets are repriced continuously. An unlisted asset valued periodically may show a smoother return history, partly because its valuation responds more slowly. Lower reported volatility therefore deserves examination alongside valuation frequency, methodology, independence and redemption terms.
ASIC has been relentless in calling out valuations for private market assets, particularly private credit, and as far as property and related development is concerned, with good reason. However, as we've previously noted, not all private credit is the same, even if nervous investors might assign them all to the same bucket, or put them under the same label.
Private credit still offers worthwhile opportunities provided there's a clear understanding of both the underlying investment, and how its reported value is established. A reassuring return series carries more weight when investors can see the evidence supporting it.
Which of course leads us to the Firmus float - or rather non-float. Funds that invested in Firmus through their earlier cap raising rounds are going to have to decide carefully how to arrive at their October month-end valuations. Too generous, and fund managers risk smart investors redeeming at an attractive, but unrealistic NAV, leaving others to potentially wear the pain in due course. Alternatively mark the value of Firmus down too far, and risk taking a performance hit.
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