US inflation pressure cools


Tracey-Lee Solomon

The most important data releases of the week are related to inflation dynamics. Domestically, we saw the rebased and reweighted Producer Price Index (PPI) for January ticking up in line with expectations. On the global front, data from the US and Japan took centre stage, with Eurozone (EZ) figures expected later today.

In the US, the Personal Consumption Expenditures (PCE) data reflected a moderation in annual inflation, as expected. The release was keenly awaited, with a downside surprise likely to have prompted expectations of an earlier interest rate cut by the US Federal Reserve (Fed). Fed officials have consistently resisted such a move, and the second estimate of Q4 GDP growth reinforced the notion that there was no immediate pressure on Chairman Powell and his board of governors to lower rates in the near term. Although GDP growth saw a slight downward revision, the revised composition of the economy suggested stronger domestic demand than previously estimated. On the flip side, a higher-than-expected inflation report would have further pushed back expectations for rate cuts and bolstered the dollar. Presently, markets are pricing in the first Fed cuts to occur in June, and the sustained strength of the US economy relative to the weaker Eurozone prompts speculation on which major central bank will move to cut rates first.

EZ inflation data will be released later today. Preliminary February figures from major economies such as Germany and France indicate a deceleration in inflation, with Germany slightly falling short of expectations. Should the EZ witness a faster inflation slowdown, calls for the European Central Bank (ECB) to cut rates ahead of the Fed could intensify. Notably, ECB officials have consistently emphasised that wage data would be a crucial determinant in deciding when to ease interest rates. The ECB is scheduled to release its quarterly indicator for negotiated pay for the first quarter of 2024 towards the end of May, just before its June Monetary Policy Committee meeting.

Finally, Japan's inflation report revealed a moderation in annual core inflation for January, but still came in above market forecasts and maintained a level above the Bank of Japan's 2% target. Unlike in other advanced economies, the upward surprise was seen as positive news, sparking beliefs that sustained higher inflation could stimulate wage increases and pave the way for policy rate hikes. Indeed, a Bank of Japan board member indicated the necessity of reevaluating their ultra-loose monetary policy and potentially shifting away from negative interest rates.

On the domestic front, it was a relatively quiet week after the excitement of last week’s Budget. The release of the reweighted PPI for January indicated an acceleration in producer prices, in line with expectations. Additionally, the SA Revenue Service (SARS) unveiled January's trade balance, revealing a larger-than-anticipated trade deficit, primarily due to decreased exports. Against the backdrop of weak export performance and logistical challenges facing the country, the appointment of Michelle Phillips as CEO of Transnet by Public Enterprises Minister Pravin Gordhan was well received. Phillips, who previously served as acting CEO following Portia Derby's resignation late last year, brings over two decades of experience within the state-owned entity. Her appointment was welcomed by business.

In financial markets, the rand managed to regain some ground on Thursday following the release of US PCE data. Despite this, the rand experienced slight weakness against major currencies week-on-week, with persistent "hawkish" rhetoric from central bank figures supporting safe haven assets like the dollar and gold. Indeed, gold prices saw a second consecutive week of increase. Conversely, equity markets faced pressure, with the JSE Alsi losing 1.9% week-on-week. Similarly, the S&P 500 and FTSE 100 indices also recorded slight losses.

In commodity markets, the Brent crude oil price remained relatively stable after two consecutive weeks of gains. However, the combination of a higher oil price and a weaker rand means that consumers will face increased fuel prices in March. It is anticipated that the price of 95 UL petrol will rise by R1.20 per litre on Wednesday, while the price of Diesel 0.05% is expected to increase by R1.08 per litre. Reports indicate that OPEC+ will extend their voluntary supply cuts, originally scheduled to end in Q1, into the second quarter of this year, thereby maintaining oil prices at current levels.


On Tuesday, Stats SA will release the Q4 GDP figures. Following a 0.2% q-o-q contraction in GDP in Q4, we expect a slight quarterly expansion in Q4 – meaning the economy is set to avoid slipping into a technical recession. Our full-year forecast is at 0.6% growth for 2023, but the available high-frequency data suggests that an upward surprise in Q4 and, by extension, the full-year growth figure is possible. From the expenditure side, the big uncertainty is around the impact of the intense harbour and rail disruption on net trade and inventories. The net trade dynamics could also impact the Q4 current account released on Thursday. The current account deficit unexpectedly narrowed in Q3. Looking at GDP from the production side, the big unknown is agriculture – which was an big drag on Q3 growth – and the ‘invisible’ tertiary sectors, where we do not have any high-frequency data. Clients can expect a comment on the data on Tuesday afternoon.

The RMB/BER Business Confidence Index (BCI) for 2024Q1 will be released in the middle of the week. In Q4, confidence slipped by two points to 31 as a 15-point rise in retail confidence was outweighed by a steep 24-point drop in confidence in new vehicle dealers.

On the international front, the Bank of Canada and the European Central Bank have scheduled monetary policy announcements next week. Both central banks are expected to keep their policy interest rates unchanged, but markets will be paying careful attention to the tone of the statement for more insight into when the banks might be comfortable enough to cut. On Friday, attention will turn to the US labour market when the Bureau of Labor Statistics releases the February nonfarm payrolls report.


Lisette IJssel de Schepper


Headline producer price (PPI) inflation for final manufactured goods quickened from 4% to 4.7% y-o-y in January. This acceleration was in line with expectations, with food products making the biggest contribution (+1.2%pts). On a monthly basis, PPI rose by 0.1%. Of the PPI series compiled by Stats SA, the index tracking electricity and water rose at the fastest pace in January (up 16.8% y-o-y), while mining PPI fell by 5.9%. We expect headline PPI to tick up in Q2 before slowing in the second half of the year.


Trade data released on Thursday showed that a 12.8% m-o-m decline in exports and a 2.5% uptick in imports resulted in a trade balance deficit of R9.2bn in January. Meanwhile, private-sector credit extension grew by just 3.2% y-o-y. Mortgages were down once more, while installment and leasing finances accelerated – indicative of a consumer under pressure.


Romano Harold


The US PCE data – the Fed’s preferred gauge of inflation – showed a moderation in price pressure. The PCE price index rose by 0.3% m-o-m in January, but the annual rate cooled (2.4% in January vs 2.6% in December). PCE inflation peaked at just over 7% in mid-2022. Core PCE inflation, excluding food and energy costs, increased by 0.4% m-o-m. However, the annual core PCE rate eased to 2.8% in January from 2.9% in December. This marks a year-long streak of cooling and the slowest annual increase since March 2021.

The US GDP growth estimate for Q4 was downwardly revised, but the composition of growth was more solid. Real GDP grew at an annualised rate of 3.2% q-o-q in Q4 (vs an initial 3.3% estimate), following growth of 4.9% q-o-q in Q3. The downward revision was mainly due to lower inventory investment, but consumer spending was stronger (up 3% q-o-q in Q4 vs an initial 2.8%).

The US manufacturing sector faced a more challenging start to the year. After declining by 0.3% m-o-m in December, new orders for manufactured durable goods slumped by a worse-than-expected 6.1% m-o-m in January. This downturn, the most pronounced since April 2020, was attributed mainly to a 16.2% m-o-m fall in transportation equipment orders, with non-defence aircraft and parts hardest hit (down 58.9%). The weakness should thus not necessarily be sustained going forward.


Japan’s consumer inflation rate slowed in January. Headline CPI slowed to 2.2% y-o-y, the lowest since March 2022, from 2.6% y-o-y in December. The slowdown was partly due to food prices rising at the slowest pace in more than one year. Consumer prices fell flat in January after rising by 0.1% m-o-m in December. Meanwhile, core inflation cooled to a near two-year low of 2% y-o-y in January from 2.3% y-o-y in December.


In China, the official NBS manufacturing PMI edged down to 49.1 in February from 49.2 in January. Among the major subindices, the supplier’s deliveries index fell the most (48.8 in February vs 50.8 in January). This was followed by the production index, which contracted for the first time in nine months (49.8 vs 51.3). There was better news outside of manufacturing, with the NBS non-manufacturing PMI increasing to 51.4 in February from 50.7 in January. Within the non-manufacturing sectors, service activity performed better (51 vs 50.1), boosted by a longer Lunar New Year holiday. Going against the NBS print, the Caixin general manufacturing PMI increased to 50.9 in February from 50.8 in January. This was the highest reading since August 2023 and the fourth consecutive month of sector improvement. This rise was driven by the fastest growth in manufacturing production since May 2023 due to improved market conditions and higher new order volumes.


Editor:          Lisette IJssel de Schepper
Tel:               +27 (21) 808 9777

Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms

View PDF Version of this article

Name: US inflation pressure cools