EM Inflation – Changing Momentum?

EM Inflation Continues to Accelerate

We’ve got more “lower than expected but…” inflation prints in emerging markets (EM) this morning – mostly in LATAM. The problem is that inflation continues to accelerate – and often at an alarming speed. Chilean headline inflation, for example, jumped from 11.5% year-on-year in May to 12.5% in June. And this tells us that a 50bps (at least) rate hike next week is a done deal. Brazil’s inflation also edged up in June (to 11.89% year-on-year). An upside surprise in services prices is concerning, but headline inflation stayed below April’s peak, while the diffusion index – which shows how widespread inflation pressures are – declined further to 66.6%. This tells us that there may be a ray of hope for “peak inflation”, but the market expectation of two more rate hikes in Brazil (+50bps and +25bps) seems completely justified at this stage.

EM Policy Responses to Inflation

Moving to “simply higher than expected” inflation group, Hungary’s prices rose sharply by 11.7% year-on-year in June, making the central bank (MNB) look like a credible institution after yesterday’s massive 200bps rate hike. Mexico’s central bank (BdeM) is also working very hard on maintaining policy credibility - yesterday’s minutes were very hawkish and sent a strong signal about another 75bps rate hike. The Polish central bank (NBP), however, continues to search for dovish excuses – despite annual inflation surging to 15.6%. The main argument is that only ¼ of inflation sources are domestic – fair enough, but external factors can still affect inflation expectations. We understand why Brazil is on its way to end the tightening cycle – the real policy rate is already above neutral and the highest in EM. But Poland’s real policy rate – adjusted by whatever inflation measure you choose – is the most negative in EM. So, Governor’s comment that Poland might “forgo further rate hikes” sounds like a policy mistake. In the meantime, Poland’s local bonds have the 3^rdworst total return (among GBI-EM constituents) month—to-date, quarter-to-date, and year-to-date. Just saying…

Global Food Prices and EM Inflation

One new development on the inflation front is that some sell-side institutions started to make a case for respite in food prices. This, of course, would be fantastic, because food accounts for a larger share of inflation basket in emerging markets than in DM (especially in parts of LATAM and EM Asia). What’s a bit concerning is that the unhelpful (=very low) base effect might last well into the fall in quite a few countries (green color on the chart below), pushing food inflation higher from the technical point of view. Stay tuned!

Chart at a Glance: Food Prices and EM Inflation – Mind the Base Effect!

Source: VanEck Research; Bloomberg LP