Inflation Persistence in EM
August 24, 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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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.