Inflation Has Likely Peaked in Latin America’s Largest Economies
(Bloomberg) -- Consumer prices rose less than expected in Brazil and Mexico in early December, signaling that inflation is starting to cool in Latin America’s biggest economies after reaching the fastest pace in about two decades.
Annual inflation slowed to 10.42% in Brazil and 7.45% in Mexico, compared with forecasts for 10.46% and 7.7%, respectively.
The relief comes after policy makers regularly increased rates to bring inflation back to target. Brazil’s central bank lifted the Selic 725 basis points this year, the most aggressive monetary tightening campaign among major economies. Mexico’s central bank, known has Banxico, has increased borrowing costs 1.5 percentage points over five straight decisions beginning in June.
While the numbers released Thursday are a welcome development, they still show central bankers have a lot of work to do in order to stabilize prices.
Brazil’s inflation remains way above the 3.5% target for 2022. Adriana Dupita, Latin America economist for Bloomberg Economics, said the data indicate that rate has finally started its descent after hitting an 18-year high of 10.74% in November.
“The bad news is that measures of underlying inflation, such as core and diffusion, continue to show that inflation continues to run hot and widespread in Brazil,” she said.
Read more: Brazil Weighed Bigger Rate Hikes to Fight Above-Target Inflation
Higher borrowing costs have helped to drag the Brazilian economy into recession, but policy makers are forging ahead with further interest-rate hikes. In early December the central bank took the Selic to 9.25% and signaled that it would boost rates by 150 basis points for the third consecutive time when it meets again in February.
Core Inflation Problem
In Mexico, inflation is expected to slow further after reaching 7.7% last month, its fastest pace since early 2001. But economists cautioned against celebrating the drop as core inflation, a measure that excludes volatile items such as fuel, accelerated to 5.87%, from 5.67% two weeks earlier.
“Core kept on its upward pressure,” said Janneth Quiroz Zamora, vice president of economic analysis at Monex. “We don’t rule out another spike” in the coming weeks.
Banxico targets inflation at 3% plus or minus one percentage point, and sped up the pace of monetary tightening last week to help reach its goal, delivering a half-point hike that took the overnight rate to 5.5%. Outgoing Governor Alejandro Diaz de Leon said Banxico isn’t committed to further half-point hikes in the future, and that it expects inflation to peak in the last quarter of this year.
Thursday’s data, however, continued to worry at least one Mexican central banker as many non-core items such as processed food rose in price. “This is not good news, since the crux of the problem persists,” Deputy Banxico Governor Jonathan Heath wrote on Twitter.
Despite lingering fears, William Jackson, an economist at Capital Economics, expects inflation to eventually ease in Brazil and Mexico as energy costs fall next year. That will help policy makers maintain course: “We think that central banks in both countries will maintain their current pace of tightening,” he wrote in a research note.
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