‘US inflation surge raises spectre of recession, SA in for more rate hikes’

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‘US inflation surge raises spectre of recession, SA in for more rate hikes’

@ jjvallee/123rf.com

| Bruce Whitfield talks to Citibank Economist Gina Schoeman about how the US number affects emerging markets like South Africa.

  • Rand
  • The Money Show
  • Bruce Whitfield
  • Sarb
  • Reserve bank
  • Recession
  • Interest rates
  • Inflation
  • Fuel prices
  • Food prices
  • Us fed
  • Gina Schoeman
  • US inflation

US inflation has come in far higher than expected at a new 40-year high of 9.1%.

The number sent shock waves across global markets as it raised the spectre of possible recession says Bruce Whitfield.

The Money Show chats to Citibank Economist Gina Schoeman about the ripple effects of the surprise increase, especially for emerging markets like South Africa.

There has been underlying pressure for so long that I think what’s also surprising about the number is not just that it’s the highest in 40 years, but just how high-strung the core component is…

Gina Schoeman, Economist – Citibank

… which means effectively that US demand, which is very different from South Africa, has been so strong that core inflation has really been a surprise.

Gina Schoeman, Economist – Citibank

Schoeman notes this is a big concern for monetary policy committee members who have to try and decide on US interest rates going forward.

But there is record demand in the US as it has record levels of employment right now and pay rates have risen, Whitfield observes.

Americans are actually feeling very cash-flush and quite confident about the future **despite **the worries about interest rate hikes and slowdowns?

Bruce Whitfield, The Money Show host

Yes, absolutely. It’s one area in the world, despite the global worries about recessionary risk… it’s the tight labour market that I think makes everyone feel a little bit more more at ease because if you’ve got a job you’re likely to keep a job.

Gina Schoeman, Economist – Citibank

RELATED: Rand weakens against the dollar as US inflation quickened in May

… when have we ever seen a global recession that has not been led by the US. Also, when have we ever seen a US growth downturn where the labour market has been okay-ish? These are exceptional periods… It makes decisions about what to do with inflation that much more difficult.

Gina Schoeman, Economist – Citibank

Expectations are that the US Federal Reserve will increase interest rates by 75 basis points this month, again, but a 100-point hike can’t be ruled out she says.

What is the outlook for South Africa where the Reserve Bank (Sarb) puts inflation at 6.5%, and its next interest rate decision?

Seeing the US dollar in parity with the euro is something not often seen before… and emerging markets are going to need capital and that means their currencies will typically weaken, and that means the rand will of course follow that path.

Gina Schoeman, Economist – Citibank

RELATED: Rand weakens to beyond R17 against the Dollar amid fears of a U.S recession

In South Africa, fuel particularly is going to be under a lot of pressure as a result of the currency weakening she says.

Importantly, food imports will also be affected.

And we can expect interest rates to keep rising.

We do not have the same problem as the US economy – we do not have strong demand, we do not have a tight labour market. However, we still have inflation expectations rising… so the Reserve Bank is going to have to step in quite strongly.

Gina Schoeman, Economist – Citibank

RELATED: Inflation jumps to 5-year high, breaks through Reserve Bank target range

Listen to Schoeman’s analysis in the audio clip below:

This article first appeared on CapeTalk : ‘US inflation surge raises spectre of recession, SA in for more rate hikes’

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