From profit inflation to price deflation, Weekly News Flash

Global inflation has been the major theme of the post-COVID-19 years, stoked by supply chain disruptions, high energy prices, and robust consumer spending. Some corporations have been able to bolster margins over the past three years, thanks to consumers building up their cash reserves during the times of lockdown and government stimulus.

But, as inflation soared at a decades-high pace, we’ve not only seen upfront prices for many goods and services increase commensurately, but growing incidences of ‘stealthflation’—a term that describes the wily ways of the corporate sector increasing the cost to the consumer. Examples include charging extra for things that were once free, like checked luggage on flights or condiments in fast food stores, and shrinkflation—selling a smaller package for the same price.

Thanks to profit inflation, many companies have reported strong earnings growth this year. But there are now signs that consumers are starting to become more price sensitive against the backdrop of the global cost of living crisis and a high interest rate environment. Some analysts are even starting to mention the possibility of price deflation as consumers start to push back against the past few years of outright inflation, and the more recent stealthflation.

With interest rates tightening, supply chains loosening, China battling with deflationary pressures and consumers counting their pennies, companies in many sectors are likely to need to start competing more aggressively on price again. This process will be aided by global food and energy prices which have tended to stabilise, as well as a slow-down in credit extension. Some companies—particularly retailers—may see weaker earnings in the next year.

This is not expected to be a crisis on par with the Great Deflation of 1870 to 1890, but rather a normalisation of the economy following COVID-19 and the ensuing inflationary environment. It potentially sets the scene for interest rates to start coming down next year and a path to a soft landing. Companies with strong brands and pricing power will continue to thrive – and generally there could be a shift in focus towards cost management – but the days of consumer apathy to goods and services inflation may be over for now.

“In the US, we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it because it’s better for our customers.”

– Walmart CEO, Doug McMillon

“[Selective deflation is] helping to push overall inflation back to the Fed’s 2% target with minimal pain in terms of unemployment and lost output. In other words, it’s making a soft landing possible.”

– Preston Caldwell, chief US economist at Morningstar

Global News

“Stealthflation” is sneaking its way across the globe as price hikes are being administered through means that aren’t considered traditional, such as booking fees for purchasing flight tickets online, or McDonald’s charging for ketchup packages. Yet, 2024 may see falling inflation temper the use of outlandish methods to maintain margins, the US government wants to crack down on these so-called “junk” fees, and consumers are pushing back.
Global disinflation is the most impactful theme driving fixed income markets currently. There is a deceleration in headline inflation globally, which was first observed across emerging markets and closely followed by the developed world. Ninety One Asset Management expects the disinflationary trend to persist due to cooling food and energy prices, a slowing credit impulse, and labour market rebalancing. This will allow global central banks to pause tightening cycles earlier whilst growth remains resilient, allowing for a less severe economic slowdown.
In fact, Wednesday’s German and Spanish consumer price inflation was lower than markets had expected, and the figures fit with the idea that profit-led inflation is coming to an end. UBS states that profit-led inflation works until it does not: “Once consumers realise price increases are less about fairness and more about margin expansion, they use the force of their spending power and form a rebel alliance. Companies then must scramble to shore up customer loyalty.”
Ninety One points out that the stock market has historically done well after Thanksgiving. Over the last 30 years, the average return in December has been roughly 1%, with the market logging a post-holiday gain roughly three-quarters of the time. Furthermore, when the market rose between Thanksgiving and year-end, it went on to deliver a positive return the next year 77% of the time, with an average return of 11%.
The US dollar is headed towards a 3.7% loss for November when compared with a basket of six major currencies on signs interest rates may be coming down soon. This would be the dollar’s worst monthly performance in a year. Dollar weakness is good news for countries relying on imports of commodities, most of which are traded in dollars, as well as nations paying down dollar-denominated debt. But American businesses and consumers could end up paying more for imported goods.
US consumer spending, inflation and the labour market have all cooled in recent weeks, adding to evidence that the economy is slowing. Inflation-adjusted personal spending rose 0.2% last month after a downwardly revised 0.3% advance in September. Other data on Thursday showed recurring applications for unemployment benefits rose to the highest in about two years. The figures are consistent with expectations that the economy will moderate in the fourth quarter following the strongest growth pace in nearly two years.
Nvidia’s blockbuster year in which shares more than tripled in value amid a frenzy for artificial intelligence, is unlikely to be repeated based on the chipmaker’s last two earnings reports. The last two set of reports saw shares barely budge even as profit and sales forecasts raced past sky-high expectations. While Wall Street is still overwhelmingly positive on the stock, analysts “only” see 36% upside over the next 12 months — a nice return, but significantly less than in 2023.
Meanwhile, General Motors is buying back stock, its biggest ever to the tune of $10 billion, to appease critics of its unsteady push into electric vehicles and self-driving. During the Wednesday announcement, CEO Mary Barra promised better days are ahead. GM also boosted its dividend 33% and reinstated earnings guidance after accounting for costs of its new labour contract.
Billionaire investor Charlie (Charles Thomas) Munger, the long-time friend and business partner of Warren Buffett, has died. He was 99 years old. Wall Street mourned Munger’s passing and his astonishing run at Berkshire Hathaway. “Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation,” CEO Warren Buffett said in the news release.
As at Thursday’s close the S&P was 0.2% up for the week.

Local News

President Cyril Ramaphosa and big business (represented by the likes of Discovery’s Adrian Gore, Anglo American’s Nolitha Fakude, Remgro’s Jannie Durand and Sanlam’s Paul Hanratty) have agreed that tackling crime, but more especially corruption, will be high on the agenda in 2024, with an emphasis on solving the country’s energy and logistics problems. This follows a virtual meeting between Ramaphosa’s executive, leadership of the South African Police Service, the National Prosecuting Authority, and the business leaders.
Analysis by the Inclusive Society Institute of the latest Ipsos polls shows ANC support among eligible voters has plummeted to 33%. However, it is still likely to form a coalition government next year – but is unlikely to win a majority.
The debate and vote on the National Health Insurance Bill in National Council of Provinces (NCOP) has been delayed by a week. This comes after NCOP chairperson Amos Masondo received a letter asking that the vote be rescheduled. In terms of next steps after the vote, Ramaphosa will not just simply sign the controversial NHI Bill into law. The legislation is being presented to lawmakers after pleas from opposition parties, doctors, and business groups to change it.
South Africa is making progress in its efforts to be removed from the Financial Action Task Force’s greylist. The global watchdog’s report showed it has formally re-rated 18 of South Africa’s 20 deficiencies, National Treasury said in a statement on Wednesday. Of these, 15 were upgraded to be no longer deficient, 14 recommendations had been fully or largely complied with, and one was rated as not being applicable to South Africa.
Although November has traditionally been a positive month for the South Africa’s rand, this year the currency is on track for a monthly 0.3% decline against the dollar. (For the previous five years, November saw an average gain of 3.4%). The rand lagged its emerging market peers, reflecting negative domestic pressures.
A new risk has emerged for investors after the South African Reserve Bank confirmed that it is in talks with National Treasury to find a way to tap foreign-exchange reserves to fund the country’s growing budget deficit. Net outflows from South African stocks and bonds in the year to November amounted to R98.1 billion, more than double the R43.4 billion of outflows in the comparable period last year, according to central bank data. Non-residents now hold only 25.4% of South African bonds, compared with almost 40% four years ago.
Traders have advanced their bets for South Africa’s first interest rate cut to March 2024 after the amount of money flowing into the economy and loans to the private sector recorded their weakest growth in almost two years. Growth in money supply and private credit extension rose less than expected at 6% and 3.9% in October respectively, from a year earlier. The median estimate in a Bloomberg survey was for growth of 7.1% and 4.3%, respectively.
Contradicting recent claims made by Electricity Minister Kgosientsho Ramokgopa, Eskom officials have forecast that there will be rolling blackouts (between stages 1 and 3) every day during December and January, apart from six days. The electricity situation looks dire for most of 2024 and early 2025, with demand on the rise and uncomfortable levels of unplanned blackouts. China’s first consignment of loadshedding support will arrive this week.
Naspers says its other businesses, outside of China’s Tencent, have improved to the extent that it expects these units to reach profitability earlier than expected. The group’s value has long been tied to its almost one-quarter stake in the Chinese internet giant. It had previously expected its other investments to be profitable in the first half of its 2025 year, which is now expected to be reached by March 2024. Naspers almost doubled its earnings in its half-year to end-September.
ArcelorMittal is considering the closure of its Newcastle and Vereeniging operations, putting 3,500 jobs on the line. It says that South Africa’s dire economic position combined with the sad situations at Eskom and Transnet have undermined steel demand, accelerating the process of deindustrialisation.
Spar Group has revealed three directors ignored a whistleblower’s concerns about the botched rollout of SAP software. The system caused major disruptions to the company’s supply chain. This led to Spar suffering an estimated R1.6 billion in lost turnover and about a R720 million loss in profit.
At the time of writing, the rand was 0.9% stronger and the ALSI was 0.2% up for the week.