:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/CRFAP6D2KNGHLDX3NFFMDWGFQE.jpg "Brazil’s central bank targets annual inflation at 3.25% this year, while Mexico’s goal stands at 3%.")
Bloomberg — Brazil’s and Mexico’s consumer-price fight hit headwinds at the start of the year, indicating inflation’s descent to target in Latin America’s two largest economies won’t come quickly despite high interest rates.
Official data released Thursday showed Brazil’s consumer prices increased 5.77% in January from a year prior, just slightly lower than in December even as policymakers hold rates at 13.75%. Meanwhile, Mexico’s annual inflation sped up to 7.91% ahead of another borrowing-cost hike later in the day.
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Policymakers in both nations are counting on high rates and moderating growth to tame above-target inflation. Still, Brazil’s central bank is coming under pressure from both billions of dollars in extra public spending and harsh criticism from President Luiz Inacio Lula da Silva. Meanwhile, the price data raises odds that Mexico will leave the door open to even more tightening.
Brazil’s central bank targets annual inflation at 3.25% this year, while Mexico’s goal stands at 3%.
The price reports come as Colombia central bank Governor Leonardo Villar said in an interview that the region’s major economies are likely to keep monetary policy tight for a prolonged period after overshooting their inflation targets for years in a row.
Mexico’s core inflation, which excludes volatile items such as fuel, sped up to 8.45% from 8.35% in the prior month. The measure, which is closely watched by policymakers, had slowed in December for the first time in two years.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/EFIYV2OMXNAFZKET4QYIHIEC7A.jpg "Weaker Growth in Rich Countries Will Hit Remittances to Emerging Markets")
What Bloomberg Economics Says:
Data remain consistent with our expectation for inflation to fall in 2023, mainly driven by base effects, lower commodity prices and waning pressure from supply shocks. They also show upward pressure on prices from indexation to previous high inflation and increasing costs. That limits the downside and points to the headline and core falling less than the central bank anticipates. — Felipe Hernandez, Latin America economist
Processed food and drinks pressured inflation in January, posting a 1.25% jump from the previous month and a 14.1% leap from a year earlier. The nation’s central bank, known as Banxico, is expected to deliver a quarter-point hike later on Thursday, to take its key rate to a record 10.75%.
“The print reinforces our expectation for a slow trajectory of inflation toward its target,” said Pamela Diaz Loubet, Mexico economist at BNP Paribas SA. For the central bank, “this means that it will be difficult to openly call for an end of the cycle.”
Too Early
Brazil’s transportation costs rose 0.55% in January, compared to 0.21% in December, while communication prices leaped 2.09% and food and beverages increased 0.59%. On the other hand, clothing fell 0.27%.
What Bloomberg Economics Says:
“The small decline in Brazilian consumer price inflation in January is another little victory for the central bank — its policy of aggressive, preemptive monetary tightening is paying off. At the same time, the print backs the BCB’s argument that it’s too early to cut rates, with underlying inflation not yet compatible with the targets.” — Adriana Dupita, Brazil and Argentina economist
Lula unleashed a fresh barrage of criticism at policymakers after they held the Selic unchanged last week and cited concerns about public spending and unbuckling inflation exceptions. The leftist leader has pledged to overhaul the economy in his third term, and says high borrowing costs are hurting investment and the nation’s poor.
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The head of state called the decision an “embarrassment” and questioned the value of an autonomous central bank. The jabs may be backfiring as traders bet that the monetary authority won’t cut rates as soon as initially thought.
Brazil’s economic team is considering an early review of the country’s inflation targets in an attempt to defuse tensions between Lula’s administration and the central bank, according to two government officials with knowledge of the matter.
“The main risk is related to de-anchoring of medium and long-term expectations due to the uncertainty regarding the path of structural economic reforms,” Banco Santander SA economists Daniel Karp and Felipe Kotinda wrote in a note.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/WGRZHTIPFJDJBLS52BNXEGJWRQ.jpg "Emerging Market Bond Decline Surpasses 2008 Slump Due to Stronger US Dollar")
Meanwhile, the combination of simmering consumer prices and tight financial conditions is wearing on demand.
In a separate release on Thursday, Brazil’s statistics agency said retail sales fell 2.6% in December from the month prior, more than the medium estimate of a 0.8% drop from economists. Sales rose 0.4% from a year earlier.
--With assistance from Giovanna Serafim and Rafael Gayol
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