Summary
EM inflation might be close to peaking, but still too high and broad-based for comfort. EM Asia is getting ready for the higher inflation/slower growth policy challenge.
EM Inflation Targets
The latest data releases indicate that we might be getting closer to peak inflation in emerging markets (EM) – the consensus forecast sees meaningful second half 2022 disinflation in that part of the world. Time to rejoice? Well, despite the improving outlook, inflation is still way too far from official targets pretty much everywhere in EMEA and LATAM (see chart below). And core inflation is not too well-behaved either. For example, Mexico’s core inflation accelerated to 6.21% year-on-year in January, surprising to the upside once again. This factor alone should ensure the continuation of policy tightening in these regions, and indeed the consensus sees Mexico delivering another 50bps rate hike tomorrow. Besides the distance from the target, what other factors/developments matter for EM central banks in the current situation?
Broad-Based Inflation Pressures
One big concern is that inflation is no longer driven only by the COVID-related disruptions/higher commodity prices, and price pressures are widespread. Today’s inflation release in Brazil showed that even though headline inflation had already peaked, the diffusion index1 stayed above 70%. This is one of the reasons why inflation is expected to plateau at a high level for several months before disinflation kicks in (see chart below). The Brazilian central bank also remains laser-focused on the fiscal outlook, especially the recent push to ease price pressures by lowering some fuel taxes. The key concern here is that such policies can lead to higher inflation later on, potentially extending the hiking cycle and hurting the growth outlook.
EM Asia Growth/Inflation Challenge
Continuing the growth theme, Thailand’s central bank (BoT) drew attention to the fact that high inflation eats into real wages – a major “negative” as regards consumption and growth. Finding the right balance in this area would be a challenge for other “pro-growth” central banks in Asia, if regional inflation continues to grind higher. Given that EM Asia is a latecomer to the EM hiking cycle, developments in the U.S. can have a greater impact on regional policy response functions. Tomorrow’s inflation release in the U.S. will be closely watched, because a meaningful surprise in either direction can shift the market expectations for the U.S. Federal Reserve’s (Fed’s) March rate hike (currently in the middle of the 25-50bps range). Stay tuned!
Charts at a Glance: EM Inflation – Long Way to Targets
Source: Bloomberg LP
1A diffusion index is a statistical measure often used to detect economic turning points. It aggregates multiple indicators by examining whether they are trending upward or downward, but ignores the magnitude of the movement.
Originally published by VanEck on February 9, 2022.
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