Bogotá — With Argentina and Venezuela as the main exceptions, most major Latin American markets have already surpassed peak inflation and are now experiencing drops in the cost of living. This is setting the stage for central banks in the region to lower interest rates, which could be supported further by a weaker dollar and a recovery in demand.
The US dollar’s loss of strength in the region could lower the cost of living in countries that are experiencing currency appreciation, as they continue in their fight against inflation. A better exchange rate in Latin American countries could translate into decreased import costs, which typically account for more than 20% of the Consumer Price Index (CPI) basket in these countries.
“The disinflationary process in the region continues to unfold significantly, supported by stronger currencies compared to what we had in 2022, as well as by the normalization of demand, reflecting contractionary monetary policies and lower commodity prices,” explained Carolina Monzón, Economic Research Manager at Itaú Colombia, in an interview with Bloomberg Línea.
According to the analyst, the combination of these factors has opened the door for inflation corrections in Latin America, although the slowdown is moderating in relation to what was seen in previous months, especially in Brazil and Chile.
In Brazil, consumer prices rose 3.99% year-on-year in July, above the median estimate of 3.94% from analysts surveyed by Bloomberg. Prices in Brazil increased by 0.12% on a monthly basis. Meanwhile, in Chile, the Consumer Price Index (CPI) clocked in at a monthly pace of 0.4% and annual rate of 6.5% in July, according to data from the National Institute of Statistics (INE). While the results exceeded market analysts’ consensus, annual inflation in Chile reached its lowest level since October 2021.
“In any case, these currency corrections have created room for inflation to fall, especially for tradable goods and components throughout the region, and also in a scenario of import [price] corrections,” pointed out Carolina Monzón.
The analyst added that attention should be paid central banks’ decisions in the coming months, and how the process of convergence towards inflation targets in Latin America unfolds.
Analysts from Credicorp Capital told Bloomberg Línea that “a weaker dollar will significantly favor inflation-lowering in most of the region’s economies.”
“In fact, in its minutes, the Central Bank of Chile referred to this issue as an important factor that has been generating better-than-expected behavior in recent months, and has actually led to a 100 basis point rate cut in the July meeting, surprising the market, which had expected a smaller cut,” noted Daniel Velandia, Managing Director and Chief Economist of Research at Credicorp Capital.
Year-to-date, the Latin American currencies that have appreciated the most against the US dollar are the Colombian peso (18.71%), the Mexican peso (13.74%), the Brazilian real (5.95%), and the Peruvian sol (2.47%). In contrast, the Chilean peso has depreciated by 0.70%, and the Argentine peso by 49.39%.
In Colombia, inflation posted its fourth consecutive month of deceleration, reaching 11.78% annually in July. In Mexico, general inflation stood at 4.79% annually in July, the lowest level of consumer price increases in the last 28 months.
According to a recent Itaú report, a stronger Colombian peso supports lower inflation and sooner-than-expected rate cuts. “Inflationary inertia and the reduction of fuel subsidies lead to a more gradual inflation adjustment than in other economies in the region. However, the accumulated appreciation of the peso will contribute to a faster inflation adjustment,” the report stated.
Credicorp believes that in markets where the dollar has weakened the most, the benefits should increase over time. “The impact on inflation is not the same in each country in the region. So, there are various estimates by the central banks themselves of a pass-through coefficient (exchange rate pass-through to prices) that can range between 6%-7% and 13%,” explained Velandia.
Depending on the economic cycle and the country, a 10% currency appreciation against the dollar could have an impact of approximately 60 to 130 basis points over a period of six to twelve months.
“Anyway, this is subject to uncertainty. Let’s remember that, during the last year, businesses didn’t necessarily raise the prices of final goods at the same rate as the increase in costs. So, a weaker dollar won’t necessarily immediately imply lower inflation through imported goods, but over time, in the coming months, this should become more evident, especially if the dollar remains weak in the coming months,” Velandia further explained.
