Latin America’s Surging Prices Spell Hard Work for Central Banks

(Bloomberg) -- Painful price increases across Latin America in September mean lots more work for the region’s major inflation-targeting central banks.

Consumer prices soared well past policy maker’s tolerance levels in Brazil, Mexico, Chile, Colombia and Peru last month, largely on rising food and energy costs. The price shocks suggest inflation may be spreading to core items and services, paving the way for more interest rate hikes across the region. 

Central banks are grappling with rising services prices as people resume their normal lives, while droughts and extreme weather cause energy bills to spike throughout the region. At the same time, fiscal concerns over pandemic spending persist as nation’s like Chile continue to inject billions of dollars worth of aid into their economies.

On Friday, annual inflation in Brazil, Latin America’s largest economy, clocked 10.25% -- more than double the central bank’s target of 3.75%, and the fastest pace since February 2016. In Chile, consumer prices rose 5.3% from a year ago, the most since 2014. 

What Bloomberg Economics Say

“Food and fuel are the two main sources of pressure across the region. Then looking at the core, inflation of tradable goods has also increased, due to higher global inflation, transport costs and in some countries currency depreciation. The fear is that high inflation mainly due to transitory shocks ends up spreading to prices of other goods and services and contaminating expectations.”

--Felipe Hernandez, Latin America economist

In Colombia, where annual inflation is running at 4.51%, authorities responded by raising interest rates for the first time in over five years last week. Other countries are facing even higher prices despite applying more restrictive monetary policy. 

Mexico’s annual inflation accelerated to 6% even as the central bank raised interest rates by 75 basis points since June, and cooking gas prices were capped. Mexico, Chile and Colombia target annual inflation at 3%, with a tolerance range of plus or minus one percentage point.

Shocks and Demand

Supply-chain snarls are now compounding demand challenges in Mexico like elsewhere in the region, said Joan Domene, an economist with Oxford Economics. “We have too many shocks in a country prone to many inflationary shocks,” he said.

The combined effect has damped efforts by policy makers to rein in prices, while domestic volatility has complicated matters in some places. “The currency meltdown and surge in commodity prices explain much of the recent increase,” in Brazil, said Adriana Dupita, a Latin America economist with Bloomberg Economics.   

Brazilian authorities have raised the Selic rate by 425 basis points since March in response, and signaled another full-percentage point hike is coming later this month. Still, inflation expectations for 2022 have continued to rise due to political clashes between the top court and President Jair Bolsonaro, and concerns over how much he’ll ramp up public spending before his 2022 re-election bid.

Meanwhile in Peru, where annual inflation is running at 5.2% -- more than double target -- investors continue to fret over the leftist of administration of President Pedro Castillo. The sol is still down more than 11% since Castillo won the first round of Peru’s presidential election in April despite a recent interest rate increase. To ease some of those fears, Castillo has retained Julio Velarde, one of Latin America’s longest-serving central bank chiefs, as head of the monetary authority.

Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said persistent inflationary pressures mean central banks will have to act faster to limit the damage. 

“And in most places they also have to guard against financial instability given unsettled fiscal and political backdrops,” he said.

©2021 Bloomberg L.P.