Two-faced markets in a two-faced month

January is named for Janus, the Roman god of archways and doorways. Janus is also the god of beginnings, hence the first month of the year carrying his name. He is famously depicted as having two faces, one looking forward and one looking back.

In the spirit of Janus, the first note of 2023 looks back on last year and forward to see how the main macro themes are evolving, starting with inflation.

Down but not out
The good news is that inflation rates across the world have peaked and are heading lower. In the US, for instance, consumer inflation hit an annual rate of 9% in June but had fallen to 6.4% in December. In the Eurozone, the decline is less pronounced but still there, with consumer inflation falling to 9.1% in December from a peak of 10.6% in October.

However, the big question remains whether inflation has been knocked out for good. Most of the declines in the headline numbers are due to falling goods inflation (in some instances, falling goods prices). But service inflation continues to rise steadily. In the US, this is partly due to rental inflation which should peak and decline soon given the weakness in the housing market. But other forms of service inflation could remain elevated as demand remains strong and worker shortages put upward pressure on wages.

South African inflation also eased to 7.2% year-on-year in December. Importantly, core inflation – excluding volatile fuel, food and energy prices to provide a better view of underlying inflationary pressures – also declined slightly to 4.9%. The approval of Eskom’s 18% tariff hike is a blow to consumers, but largely factored into most inflation forecasts already. Inflation should continue to moderate during the year, and this means the Reserve Bank can go easier on the rate hikes. This week’s increase could be the last in the current cycle.

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