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Has US inflation peaked? Understanding rising prices and SA’s consumer confidence slump

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses whether US inflation has peaked yet, and a plunge in South African consumer confidence. US headline PCE inflation for May was at 4.1% y/y, but since end-April the oil price has fallen almost 34%. This should bring down inflation in June – however there may be other inflationary pressures, which would force the US Fed to hike rates.

The focus areas during the week included:

• The S&P 500 declined by 2%, hurt by a pullback in large-cap technology and artificial intelligence (AI)-related shares. Some investors appear to be reassessing the durability of the strong momentum that has propelled technology stocks higher over the past few months. In contrast, the small-cap Russell 2000 Index gained 1%. Similarly, South Korean equities fell sharply, with the KOSPI Composite Index losing 7.1% of its value, undermined by a steep reversal in AI- and memory-linked shares. Trading halts were triggered twice during the week as leveraged single-stock exchange-traded funds tied to Samsung Electronics and SK Hynix (the world’s second-largest memory chipmaker) appeared to intensify index-level declines.
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• The STOXX Europe 600 Index ended broadly unchanged, up 0.04%, while Japan's stock markets declined. The Nikkei 225 Index dropped 2.7% and the broader TOPIX Index lost 2% - also hurt by the global sell-off in technology stocks. SA’s All-Share Index lost 2.1% of its value, with the Financial 15 down 3.1% and the Resource 10 index off 2.2%. Year-to-date the local equity market is down 4.8%.
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• The US bond market rallied further. Yields moved lower across most maturities as oil prices declined and the May PCE data was roughly in line with expectations. There is, understandably, a high degree of uncertainty about the stability of the US/Iran ceasefire. The yield on the benchmark 10-year US government bond ended the week at 4.38%, down from 4.51% at the start of the week. Unsurprisingly, this supported a further decline in South African long-bond yields, which are down around 50 bps since 8 June.
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• The dollar strengthened by 0.6% against the euro and is up 2.4% month-to-date. Correspondingly, the emerging market currency index has lost 2% against the dollar, while the rand is down a slightly more modest 1.8%. On a trade-weighted basis, the rand is flat for the month.
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• The US personal consumption expenditure (PCE) price index rose by 0.4% m/m in May, in line with market expectations. Core PCE increased by 0.3% - also in line with expectations. On a year-on-year basis, headline PCE inflation accelerated to 4.1%, the highest reading since April 2023, while core PCE inflation edged higher from 3.3% to 3.4%, its highest level since October 2023. Energy prices were a major contributor: they were up 24.3% y/y. The resilient US labour market and stronger-than-expected GDP growth should give the Federal Reserve (Fed) more room to prioritise inflation risks in its policy discussions. If the recent pullback in energy prices persists (they are down 34% since the end of April 2026), the Fed may be reluctant to increase interest rates. However, if the higher energy costs feed into broader goods and services inflation, if long-term inflation expectations move meaningfully higher, or if the US/Iran ceasefire collapses and pushes the oil price up significantly, then the Fed is likely to consider hiking interest rates. While the US/Iran ceasefire remains in effect (despite some renewed attacks over the weekend), it remains extremely fragile and uncertain. The international oil price (Brent) has declined to around $72.60/bl, its lowest level since the start of the Middle East conflict. Towards the end of the week, the US Energy Information Administration (EIA) reported that UAE oil exports had recovered to nearly 85% of pre-war levels.
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• US personal income and personal consumption both increased by 0.7% m/m in May, ahead of market expectations. This indicates continued consumer resilience despite elevated inflation – and it is supported by improved labour market conditions. The increase in spending was relatively broad-based, led by gains in financial services and insurance, health care, housing and utilities, and energy goods.
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• The S&P Global PMI data for the US showed that business activity improved for the third consecutive month in June. However, employment softened for the second consecutive month, as companies continued to focus on cost control amid elevated input prices and some concerns about the economic outlook. Supply chain delays also became more widespread, partly due to tariffs and the war in the Middle East, while input price inflation remained elevated.
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• The US Bureau of Economic Analysis revised first quarter real gross domestic product (GDP) growth up to an annualised 2.1% from its prior estimate of 1.6%. The change was driven by a downward revision to imports, though this was partially offset by a downward revision to consumer spending. Higher domestic investment activity provided some additional support. Overall, the report suggests that the economy entered the second quarter of 2026 with better momentum than previously thought, recovering from the fourth-quarter slowdown that was partly driven by the government shutdown in October 2025.
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• In Q2 2026, South African consumer confidence declined from -7 (which was a 15-month high) to -19 index points, which is a substantial fall-off, but not unexpected. The 12-point decline suggests that there has been a notable reduction in consumers' willingness to spend, as higher domestic fuel costs and higher interest rates weigh on household budgets, particularly the high- and middle-income groups. These dynamics probably resulted in a significant quarter-on-quarter slowdown in real consumer spending in Q2 2026.
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• According to the European Central Bank’s (ECB) latest survey, the household sector’s one-year consumer inflation expectation in the Eurozone declined to 3.5% in May, the lowest level in three months. The same survey also found that Eurozone consumers expect GDP in the region to decline by 1.7% in the year ahead, which is an improvement from the 2.2% contraction that was expected in the April survey.
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• The core consumer price index for the Tokyo area, considered a leading indicator of nationwide trends in inflation, rose by 1.6% y/y in June, matching consensus estimates and accelerating from 1.3% y/y in May. The acceleration was largely due to higher water service fees after the expiration of government subsidies. This is the first pick-up in Tokyo’s consumer inflation in eight months, reinforcing expectations that the Bank of Japan (BoJ) will continue to raise interest rates. Governor Kazuo Ueda, (in remarks delivered by Deputy Governor Ryozo Himino), echoed this view. He said the BoJ sees upside risks to inflation relative to its 2% target and expects to continue adjusting policy in response to economic activity, prices, and financial conditions while monitoring risks from the conflict in Iran and other factors.
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• Japan’s Prime Minister, Sanae Takaichi, announced a major fiscal expansion aimed at strengthening Japan’s long-term growth prospects. She set out an investment road map of around ¥370 trillion ($2.3 trillion) up to 2040. The plan envisages public-private investment across 17 strategic sectors, including AI and semiconductors, as the government seeks to enhance Japan’s industrial competitiveness and economic security. The initiative is a flagship policy of the Takaichi administration, which advocates responsible and proactive fiscal policy.
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• The People's Bank of China (PBoC) left the one-year and five-year loan prime rates (LPRs) unchanged at 3% and 3.5%, respectively, in line with market expectations. The rates have been held steady for 13 consecutive months. The one-year LPR is used as a benchmark for household and corporate loans, while the five-year LPR is a reference for mortgages. The PBoC also said it will begin conducting overnight reverse repo operations at the end of June, using a new liquidity management instrument designed to improve short-term liquidity management and strengthen monetary policy transmission. The move follows Governor Pan Gongsheng's announcement at last week's Lujiazui Forum outlining changes to the central bank's operating framework.
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• Speaking at the World Economic Forum's Summer Davos meeting in Dalian (China), China’s Premier Li Qiang defended China's technological and industrial competitiveness. He rejected claims that China's export strength is primarily driven by state subsidies, and reiterated Beijing's commitment to innovation, advanced manufacturing, and further opening of the economy. The remarks were broadly consistent with recent official messaging and reinforced policymakers' emphasis on technological upgrading and high-quality growth amid ongoing trade tensions with the US and Europe.
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• On Monday, Keir Starmer announced his resignation as UK prime minister after several months of political pressure. The Labour Party will now choose a new leader, which is currently expected to be Andy Burnham. The UK has had six prime ministers since 2016, namely David Cameron, Theresa May, Boris Johnson, Liz Truss, Rishi Sunak and Keir Starmer.