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Latin America's Inflation Woes Are Growing

Summary

Despite a global downturn in commodity prices, inflation in most Latin American countries is picking up. Mexico and Costa Rica were the only regional outliers in 2015.

Annual inflation in April: Brazil 9.28%, Colombia 7.93%, Chile 4.20%, Peru 3.91%, Mexico 2.54%.

Inflation in Venezuela was 270.7% in 2015. Recent electricity, food, and medicine shortages will drive prices further up.

Despite a global downturn in commodity prices, inflation in most Latin American countries is picking up. Mexico and Costa Rica were the only regional outliers in 2015, but still, an uptick is expected for both in 2016. Higher consumer prices have already hastened monetary tightening in some countries, a no-no in a recessionary economic environment. Why is inflation increasing? How are central banks responding? We analyzed consumer price dynamics in selected LatAm countries.

Brazil: Inflation in Latin America's biggest economy accelerated throughout 2015 and shows no sign of short-term relief. Central bank data shows that consumer prices closed last year at +10.67% year on year, their fastest pace in thirteen years. The annual inflation rate for April 2016 was 9.28%. The rate is well above the official target of 4.5% ±2%. The last Brazilian Central Bank (BCB) survey showed that economists expect consumer prices to end this year at 7.04%. This means the BCB would have failed to meet the official target for a second straight year. Market participants' and policymakers' concerns are intensifying - the central bank's minutes revealed that monetary easing is practically discarded. Three key factors are currently affecting price dynamics: the real's massive depreciation, distorting wage-indexation mechanisms, and sticky gasoline prices - which impede adjusting tariffs to reflect declining oil costs. The decision to hold the Selic rates unchanged has already raised questions of central bank autonomy. Credibility is at stake.

Mexico: Consumer prices have been declining over the past twelve months to a rate as low as 2.13% year on year, a new record low. This was a major achievement for the central bank, which has a 3% ±1% target and had failed to meet the target last year. The consumer price index (INPC) ended 2014 up 4.08%, compared with 3.97% in 2013. The absence of demand-driven price pressures, lower telecom tariffs and low crude oil prices contributed to inflation dynamics throughout 2015. However, harder comps and fiscal vulnerability make it unlikely that the official tariffs will keep declining. Consumption dynamics are picking up, but will hardly bring significant demand-side pressure. And while the peso's depreciation has had limited pass-through, a prolonged weak currency will affect inflation at some point. The last CB minutes reflected this concern. With these forces in play, market participants are currently pricing an upswing for the next twelve months. The last Banco de Mexico (central bank) survey showed that analysts expect inflation to close the year at 3.19%, which is still within the CB's target range and more than welcome. With the annual headline reading coming at 2.54% YoY, Mexico remains as our sample outlier in terms of inflation. Check more details on our vision of the Mexican economy and the bullish ETF.

Colombia: The inflation outlook has sharply deteriorated in the last months. Consumer prices increased in April by 7.93% YoY. Inflation has remained above the upper limit of the bank's target range for the...


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