Inflation fight isn’t over

South Africa and the rest of the world are still far away from getting inflation under control, and bringing it down will not be a smooth ride.

This is according to Sanlam’s Nick Kunze, who told Moneyweb Now that the US’ inflation target of 2% is still far off.

Kunze’s comments come after the US released its inflation data on Thursday, 10 August. The latest numbers saw the US consumer price index (CPI) gain 0.2% last month, lifting the annualised rate less than expected to 3.2% from 3% in June.

“The Fed has been pretty vocal and pretty consistent about their rhetoric that they want inflation down at 2%. Well, we’re still quite a way away from that,” said Kunze. 

“Market watchers and traders get a little bit excited if inflation comes in, you know, ten basis points better than expected, but we’re still far away.”

He said it is also worth noting that US real rates are still -1%, compared to 2% last year and the long-term average of 3.5% to 4%.

“So they really have a long way to go,” he said. “[Considering] the interest rate rises that have been coming at unprecedented historically fast rates, it’s not gonna be a smooth ride, that’s for sure.”

In addition, Kunze said disappointing data from China is a bad sign for what could be ahead.

He said China’s debt is increasingly becoming a concern. On Monday morning, Country Garden, one of China’s top property developers, suspended trading in 11 of its onshore bonds.

According to CNN, this adds to speculation that the company may be preparing to restructure its debt as it struggles to raise enough cash in time to avoid default.

Shares in Country Garden dropped by 16% on Monday, 14 August, to a record low as investors pondered whether the company’s woes could further weigh on an already sluggish recovery in the world’s second-largest economy, CNN reported.

Those shares have lost a third of their value since last Tuesday, 8 August, when reports surfaced that the real estate firm missed interest payments on two dollar bonds. 

The news triggered a sell-off in the company’s domestic bonds, with several forced to stop trading after falling by more than 20%.

“They’ve got a real problem there,” said Kunze. “China, which has been the engine of growth and helped all of us for the world for a better part of a decade, looks to be spluttering a little bit too.”

Kunze’s comments echo those of Old Mutual Wealth’s Izak Odendaal, who said the US, and by extension, the rest of the world, is likely to avoid a recession and have a “soft landing”, but interest rates will stay high for some time.

“If you look at what the equity markets have been doing this year, it’s certainly not pricing in a recession,” Odendaal said.

Instead, the markets are pricing in a soft landing – in other words, a scenario where inflation falls and the economy cools, but there is no outright decline in income activity, employment, and profits.

“As long as the economy’s humming the way it is now, it’s difficult to say that there’s going to be a recession in the next 12 months or so.”

He said many investors assume that a soft-landing scenario is one where the Fed cuts rates and “we go back to a low interest-rate world”. 

However, Odendaal said that is very unlikely since, as long as there is momentum in the US economy, there will be the fear that inflation can either remain elevated or revive.

“And in that kind of environment, it’s very difficult to see the Fed cutting rates.”

Odendaal said a more likely scenario is a higher-for-longer interest-rate environment with solid growth for some time.

However, the higher-for-longer interest rates will mean this growth will slow over time. 

“I think the link here is how long it takes for these high interest rates to impact consumer spending and business activity,” he said. 

“It takes longer than most people would’ve anticipated, but it’s also not unusual for interest rate cycles to take time to impact economic activity.”

Rating agency S&P Global also recently said a slowdown in US inflation might be short-lived as the risk of unexpected price spikes rises, creating doubt over whether the Fed’s rate hikes are truly over.

Some of the biggest contributing declines from the recent data were from the energy sector, which makes up about 7% of the index. Gasoline, for example, fell by 19.9% year-on-year, as the overall sector saw a 12.5% decline.

But those declines are unlikely to stretch into August, as crude oil futures prices have already climbed to their highest level since November 2022.

The “long string of negative contributions to headline inflation from falling crude oil prices is about to end”, said Joel Prakken, chief US economist with S&P Global Market Intelligence.

In addition, the significant declines in airline fares, which fell 13.2% from August 2022, are unlikely to be maintained, Prakken said.

“Inflation has made a lot of progress, but it could get stuck at these levels if growth picks up,” said Callie Cox, a US investment analyst at eToro.