Latin American Central Bankers Stung by Food Inflation Jump

Central bankers in Mexico and Chile are facing above-target annual inflation and temporary food cost jumps ahead of their monetary policy meetings next week.

Consumer prices in both countries rose more than expected in April, as staple goods such as tomatoes and avocados surged in Mexico while bread and cereals did the same in Chile, according to government data published Friday. Data released earlier this week also showed food costs driving Colombia’s inflation.

Policy makers in Mexico and Chile are expected to hold rates steady on May 13 amid pressure to bolster their incipient economic recoveries. Both countries are battling against coronavirus outbreaks that have weighed on consumption and confidence. At the same time, annual inflation is running above target in both nations, driven by rising global commodity prices also base effects.

Latin American Central Bankers Stung by Food Inflation Jump

What Bloomberg Economics Says

“Higher food and fuel prices contributed to inflation in April in both Mexico and Chile. Pressure from these should be transitory and have little impact on monetary policy, although the high headline number in Mexico keeps limiting policy flexibility. Central banks are likely to put more attention to core inflation, as prices of goods continue increasing.”

--Felipe Hernandez, Latin America economist

MEXICO REACT: High April Inflation No Shock, But Raises Concerns

Consumer prices in Mexico rose 6.08% in April compared to a year earlier, while Chile’s annual inflation sped up to 3.3%. Both nations target annual inflation at 3%.

Changing Drivers

Chile’s higher food costs prompted Oxford Economics to raise its year-end inflation forecast to 3.4% from 3% previously, according to a research note. Banchile Inversiones also raised its December price estimate to 3.5% from 3.1% following Friday’s data.

In April, Chile’s inflation was also pressured by a 1.6% jump in energy prices. Meanwhile, in Mexico, those costs dropped on the month following a period of significant increases.

“Mexico’s inflation keeps rising above forecast, though the drivers have changed”, said Marco Oviedo, chief economist for Latin America at Barclays Capital Inc. “The rise on some perishable items and services surprised us, and highlight the risk of core inflation that’s too high and sticky.”

Chile’s central bank has said higher energy costs will spark a temporary up-tick in inflation in coming months without deterring plans to hold the interest rate at a record low. Indeed, in a meeting with President Sebastian Pinera on Tuesday, board members underscored the need to maintain expansive policies.

Likewise, Mexico’s Deputy Central Bank Governor Gerardo Esquivel said last month that he expects the price spike to be temporary, with inflation falling within the bank’s range in July. Policy makers in Latin America’s second-largest economy have cut borrowing costs to a near five-year low of 4% following the worst downturn in nearly a century.

Economists in the latest Citibanamex survey expect Mexico’s central bank to keep rates unchanged at that level through next year. In Chile, analysts expect borrowing cost increases in early 2022.

CHILE REACT: April Inflation Supports Slow Normalization in 2022

©2021 Bloomberg L.P.

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