Inflation in Brazil and Mexico accelerated above expectations in early October as a surge in the prices of volatile goods such as energy and food weighed on the outlook for monetary policy in Latin America’s largest economy.
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Published 24 Oct 2024 • 3 minutes of reading
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(Bloomberg) – Inflation in Brazil and Mexico accelerated above expectations in early October as a surge in the prices of volatile goods such as energy and food complicates the outlook for monetary policy in Latin America’s largest economy.
Official data released Thursday showed Brazilian consumer prices rose 4.47% from a year earlier, more than the 4.43% median estimate of economists surveyed by Bloomberg. Mexico’s annual inflation rose to 4.69% during the same period.
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A 5.29% increase in household electricity bills and a 0.87% increase in food and beverages led to Brazil’s inflation in the first two weeks of October. In Mexico, energy costs increased by 2.25% during this period, while fruits and vegetables increased by 1.94%.
Policymakers in both countries have struggled to bring inflation down to the 3% target. Still, Mexico’s central bank cut benchmark interest rates as closely watched core prices – which exclude volatile items – rose sharply. Brazilian policymakers are moving in the opposite direction, tightening monetary policy amid a resilient economy, rising public spending and worsening inflation expectations.
“The upward shock of Brazil’s headline inflation was also accompanied by worse core and services components, thus confirming inflation concerns,” said Dan Pan, economist at Standard Chartered Bank.
Amid Brazil’s worst drought, regulators have raised energy prices to compensate for low water levels at hydroelectric plants that provide about two-thirds of the country’s electricity.
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Brazil’s central bank has tightened monetary policy to boost demand and ease price pressures. Borrowing costs are 10.75% after a quarterly increase last month, and traders see them surpassing 13% next year.
Service inflation is simmering and investors are worried about the large amount of government spending under President Luiz Inacio Lula da Silva, contributing to the real weakening in recent weeks.
Core inflation
Banxico, as Mexico’s central bank is known, lowered rates by a quarter point to 10.5% last month. In the minutes for their decision, policymakers wrote that external factors like the slowdown in the US economy, as well as the sluggishness of Mexico’s own activity, should allow the bank to ease again on Nov. 14.
Mexico’s closely watched core inflation, which excludes volatile items such as food and fuel, slowed slightly in early October, standing at 3.87% compared to a year earlier. The figure is down from 3.88% previously.
“What is most important is that core inflationary pressures remain under control,” Andres Abadia, chief Latin American economist at Pantheon Macroeconomics, said of Mexico’s consumer price report. “Economic weakness, a loss of strength in the labor market and a restrictive monetary policy create a picture that shows Mexico’s inflation is under control.”
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Indeed, in August Banxico reduced its economic growth forecast for 2024 to 1.5% from the previous estimate of 2.4%, and to 1.2% from 1.5% for 2025. the third time, to 3.2%.
Going forward, central banks in both countries will face global uncertainty, especially from the November 5 presidential election in the US.
“We are in a global economic period with political risks in the US and the Middle East weighing on emerging market assets and increasing uncertainty,” Abadia said. “And when considered on top of climate change shocks and local issues, they will make central bankers more cautious than expected.”
—With the help of Giovanna Serafim, Josue Leonel and Rafael Gayol.
(Recasts story to add Mexico data, economist comments.)
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