US inflation edges up while SA's GDP data delivers a positive surprise

Our weekly podcast by Kevin Lings

Encouraging SA Q2 GDP growth; rising US inflation will not defer an interest rate cut

In this podcast, STANLIB’s Chief Economist, Kevin Lings, explores the factors that drove the 0.8% q/q growth in SA’s GDP in Q2 2025, which was above expectations and better than the Q1 performance. He also looks at the underlying drivers of the rising trend in US inflation – which are not at present high import tariffs – and the US Federal Reserve’s changing approach towards interest rate cuts.

The focus areas during the week included

The S&P 500 index ended up a robust 1.6%, and has risen by 1.9% since the end of August. Year-to-date the market is up 11.9% after reaching another record high on Thursday. The market was boosted by the heightened expectation that the US Federal Reserve (Fed) will cut rates by 25 bps in response to a softening labour market and some evidence that US companies are absorbing a large portion of the higher import tariffs. Ongoing enthusiasm about the artificial intelligence (AI) boom also helped to lift US equities.

SA’s All-Share Index also had a good week, rising by an impressive 2.9%. Year-to-date the SA equity market is up 24.2%, convincingly outperforming the S&P 500. This outperformance is still largely attributable to the Resources index, which has gained an incredible 91.9% year-to-date.

Japan’s stock markets rose sharply, with the Nikkei 225 Index gaining 4.1% and the broader TOPIX up 1.8%. Markets appeared to be unperturbed by the announcement that Prime Minister Shigeru Ishiba intends to resign, following sizable losses in two general elections within the space of 12 months. His ruling Liberal Democratic Party will hold an emergency leadership election on 4 October. Investors are likely to focus on whether Ishiba’s successor will adopt a more expansionary fiscal approach, potentially including cuts to income and consumption taxes.

US Treasuries mostly generated positive returns, with long-term yields decreasing. The 10-year bond yield ended the week at 4.06%, down from 4.1% the previous week, while 30-year yields fell by 10 bps. In contrast, shorter-term yields lost some ground on Friday after being mostly unchanged in the first four trading days.

The US dollar traded in a narrow range against the euro but it has declined by 11.7% against the European currency since the start of the year. It has weakened by 6.9% on a trade-weighted basis over the same period (using the broad trade-weighted index constructed by the Fed). We expect the dollar will remain relatively subdued in the remaining four months of the year, given expectations of successive interest rate cuts. This should continue to keep emerging market currencies reasonably strong. The Emerging Market Currency Index has gained 8.3% against the dollar in the year to date, while the rand is up 8.1%.

In August 2025, US consumer inflation rose by 0.4% m/m, which was above market expectations for an increase of 0.3%. This pushed the annual rate of inflation up from 2.7% to 2.9%. Core consumer inflation increased by 0.3% m/m, keeping the annual rate unchanged at 3.1%. While core inflation has slowed from 3.3% at the start of 2025 it is, obviously, not in sight of the inflation target and is likely to continue to head in the wrong direction over the coming months, partly because of the higher import tariffs. A breakdown of the CPI data reveals that a range of categories recorded relatively large price increase, some of which are explained by higher import tariffs. However, the rate of increase in consumer prices as a direct result of higher tariffs has not been particularly noticeable or as severe as anticipated earlier in the year – although the risks remain to the upside.

US producer price inflation slowed from a revised 3.1% to 2.6% y/y in August 2025, well below market estimates for an increase to 3.3%. Trade services inflation, which declined by a very substantial 1.7 m/m, was a key contributor to the decrease. This probably reflects an unexpected narrowing of margins for wholesalers and retailers. In July, the trade services index rose by 1% m/m. Core PPI inflation moderated to 2.8% y/y, also significantly lower than forecasts for 3.5%. The latest PPI data suggests that the tariff-related price hikes were relatively well contained in August, as companies across the supply chain absorbed a large portion of the higher costs. While price pressures are expected to increase over the coming months (see our forecast of CPI inflation), the more moderate PPI inflation data should feed through to consumer prices, helping to moderate the expected upward drift in CPI.

A 25 bps interest rate cut by the Fed on 17 September is fully priced into short-term money markets. However, more important than the rate decision are the signals that the Federal Open Market Committee (FOMC) provides for the path for monetary policy in its updated interest-rate projections (SEP). In June, the median FOMC member was anticipating two 25 bps cuts this year and just one cut in 2026. This is around half of the 150 bps easing of US interest rates that are currently priced into markets over the same period. It will also be important to ascertain how Fed Chair Jerome Powell views the risks associated with the Fed’s outlook for inflation and employment. In general, we expect the Fed will be more responsive to further signs of weakness in the labour market, even if inflation continues to trend higher in the short term, arguing that the upward drift in inflation is “temporary”.

The University of Michigan’s survey of US consumer confidence fell in September 2025 to its lowest level since May 2025, with households reporting increased concerns over inflation and weakness in the labour market. The survey showed that consumers expect inflation to increase to 3.9% over the next five years, up from 3.5% in last month’s survey. (Expectations for inflation in the year ahead were unchanged from August at 4.8%.) At the same time, fears over job losses were more pronounced in the report, echoing signs from recent labour-market indicators that the labour market has softened. The data will reinforce expectations that the Fed will cut interest rates.

US weekly initial jobless claims rose to 263 000, the highest reading in four years and well above forecasts for a pull-back to 231 000. (It is possible that the data was distorted by the Labor Day public holiday on 1 September.) Continuing unemployment claims, which measure the total number of people receiving benefits, held steady at 1.94 million. Although the US labour market has clearly softened in recent months, the combination of interest rate cuts and looming fiscal stimulus could provide some uplift in early 2026.

The US Bureau of Labor Statistics released its annual benchmark revisions on Tuesday. The revision is based on state unemployment insurance tax records. It suggests that in the 12 months from March 2024 to March 2025 the US created 911 000 fewer jobs than previously reported. The consensus expectation was that the employment data would be revised down by around 800 000 jobs. The revisions imply that about 76 000 fewer jobs per month were created between April 2024 and March 2025, which adds to the increasing array of evidence suggesting that the US labour market has softened. This must be balanced against a slowdown in labour supply, which could mean that fewer jobs need to be created each month to maintain the current level of unemployment.

In the second quarter of 2025, South African GDP grew by a very welcome 0.8% quarter-on-quarter (seasonally-adjusted, but non-annualised). This compares with an increase of only 0.1% in Q1 2025. The market’s expectation was for an increase of 0.6%. Over the past year the economy expanded by 0.6%. The GDP performance in Q2 2025 was boosted by a strong performance in retail activity (+1.7% q/q), improved growth in mining (+3.7% q/q) relative to a meaningful decline in Q1 2025 (-4.1% q/q) and a pick-up in manufacturing activity (+1.8% q/q) after two consecutive quarters of decline. Prior to the start of the two-pot withdrawal scheme in late 2024, economic conditions in the household sector were relatively tough, resulting in subdued consumer spending. However, the two pot cash withdrawals in the final quarter of 2024 and the first half of Q1 2025, coupled with five cuts in interest rates since September 2024 and subdued inflation, have provided a meaningful uplift to retail activity, which is expected to be mostly sustained for the rest of 2025. Fortunately, the negative-performing economic sectors in Q2 2025 were limited to construction activity (-0.3% q/q), which is now in its ninth year of consecutive decline, and transport and communication (-0.8% q/q). There is also a concern that the negative impact of President Trump’s 30% import tariff on South African goods will become more noticeable in the next few quarters. Fortunately, the finance (business services) sector (+0.3% q/q) remains SA’s most consistent growth dynamic, which is understandable given that the economy has become increasingly services-based.

South African mining production rose by 1% m/m in July, above the revised 0.4% m/m (revised from 0.2% m/m) growth recorded in June. On a yearly basis, mining production accelerated by a robust 4.4% y/y in July, the highest annual rate of growth since September 2024. This was up from June’s growth of 2.5% y/y and higher than market expectations for mining production to rise by 3.4% y/y (Bloomberg). The improvement in July was broad-based, with eight of the 12 mineral groups recording annual increases in output. Despite the surge in July, mining production is still 10.1% below the level of output that prevailed in January 2020, prior to the Covid-19 outbreak.

In July 2025, South African manufacturing production declined by 0.5% m/m, after growing by a revised 0.4% m/m in June. The July outcome was well below market expectations for an increase of 0.8% m/m (Bloomberg). Over the past year, production declined by a disappointing 0.7%, after a much-improved performance in Q2 2025. Despite the Q2 2025 upside surprise, the manufacturing sector is still struggling to reflect a positive change in momentum. This is partly highlighted by the fact that manufacturing activity remains 4.9% below the level of output achieved prior to the start of Covid-19 in 2020. This suggests that the sector continues to face numerous challenges, including the noticeable deterioration in domestic economic infrastructure, increased import penetration, the high cost of doing business (e.g. the cost of electricity), significant business regulation, and the impact of the 30% import tariff imposed by the US.

The European Central Bank (ECB) kept its key deposit rate unchanged at 2% this week, in line with market expectations. ECB President Christine Lagarde reiterated that the Eurozone was “in a good place”, with inflation at 2%. The central bank also slightly raised its forecasts for inflation and economic growth this year, which financial markets interpreted as a signal that the current rate-cutting cycle was over. The ECB now projects inflation at 2.1% in 2025, before slowing to 1.7% in 2026, while the economy is expected to grow by 1.2% this year compared with its previous estimate of 0.9%. However, the growth forecast for 2026 was revised down from 1.1% to 1%, reflecting expectations of slowing global demand.

German exports unexpectedly fell in July by 0.6% m/m, as US demand weakened due to higher trade tariffs. Exports to the US, which is still Germany’s biggest trading partner, declined by 7.9% m/m. In contrast, exports to the European Union rose by 2.5% m/m.

French President Emmanuel Macron appointed Sebastien Lecornu, a centrist defence minister, to replace Francois Bayrou as prime minister after he lost a confidence vote on a debt-reduction budget and his government collapsed.

In August, China’s headline consumer prices slipped back into deflation at -0.4% y/y after three months of modest increases. The decline was largely driven by a significant fall in food prices (-2.5% y/y). The August reading was down from 0% y/y in July and below market expectations for inflation to deteriorate to -0.2% y/y (Bloomberg). The stubbornly weak consumer inflation rate reflects persistently anaemic and embedded domestic demand conditions, suggesting that government needs to do more to boost underlying consumption activity. Core inflation edged up for the fourth month in a row, rising to an 18-month high of 0.9% y/y in August, led by home appliances and services inflation. Overall, core inflation also remains muted, having been at or below 1% for 40 of the last 41 months, underlining that underlying domestic demand remains subdued.

Revised figures for Japan’s Q2 2025 GDP growth showed that the economy expanded more than initially reported, growing by 2.2% q/q (annualised) from an initial reading of 1% q/q (annualised). The upward revision was mainly due to a greater-than-anticipated increase in private consumption, which has been supported by government measures to alleviate the impact of rising food and energy prices.