Inflation Persistence in EM
24 August 2022
Read Time 2 MIN
Inflation Pressures In EMEA
We’ve got a big inflation data dump in emerging markets (EM) today, and inflation persistence is still the main story - even when the numbers are not particularly earth-shattering, like in South Africa. Annual headline inflation accelerated to 7.8% in July - as expected - and core inflation (4.6% year-on-year) moved above the midpoint of the central bank’s target range. The release showed that the central bank made the right decision to hike aggressively at its last meeting (by 75bps, an unusually large move). The question is whether it will maintain the pace on September 22. Governor Lesetja Kganyago’s latest presentation - which predated today’s release - sounded hawkish. Governor Kganyago said broad-based price pressures, upside inflation risks, and second-round effects required a “little more” forceful policy response.
Diverging Inflation In LATAM
Mexico’s bi-weekly inflation print looked more concerning than South Africa’s. We’ve got yet another upside surprise - both in headline and core inflation (the latter accelerated to nearly 8% year-on-year). Brazil’s mid-month inflation, however, looked very promising. Ok, there was a small upside surprise, but headline inflation dropped to single digits (see chart below - I am in a mobile mode today, so I drew a blue arrow on the chart to show the latest print)! This is the best upside inflation surprise in a while. Brazil is not yet completely out of the woods - we are aware that disinflation is partly due to fiscal measures, and we also keep an eye on the pre-election fiscal loosening. Still, today’s release means that the current tightening cycle is most likely over.
EM Inflation And Policy Tightening
The EM inflation persistence theme will remain in play in the coming days. The South Korean central bank is expected to hike by another 25bps tomorrow, after headline inflation surprised slightly to the upside in July. And central banks in Poland and Mexico will release their minutes - would they still sound hawkish? We think that Mexico’s “no inflation respite” should translate into “no dovish monetary policy pivot for now”. But we have serious doubts about the Polish National Bank, which is trying to lean dovish again - can we get proven wrong? Sut You Need to Hike A Lot*
Chart at a Glance: EM Disinflation Is Possible - But You Need to Hike A Lot*
Source: Bloomberg LP
*Brazil IPCA-15 CPI Extended NA Index - Index that measures Brazil’s MoM Consumer Price Index. IPCA is the benchmark inflation index observed by the Central Bank of Brazil.
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