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LATIN AMERICA | 08-02-2024 14:28

Latin America’s inflation progress tempered by soaring food price pressures

Consumer price readings underscore challenges facing Latin American policymakers as they calibrate future interest rate cuts. Most of the region’s major inflation-targeting central banks have already begun reducing borrowing costs

Brazil’s and Chile’s consumer prices rose more than expected in January while Mexico’s annual inflation sped up for the third straight month as policymakers in those countries faced renewed food cost pressures.

Annual inflation in Brazil unexpectedly ran above the central bank’s tolerance range, at 4.51 percent, while Chile consumer prices rose past estimates, hitting 3.8 percent from a year ago, according to data published Thursday. Mexico’s cost of living increased 4.88 percent in 12 months, picking up for the third straight time.

All three nations were buffeted by sharp increases in staple food goods. Brazil’s food and beverages jumped 1.38 percent on the month as carrots, potatoes and beans became more expensive, while Chile’s food gained 1% on rises in meat, bread and cereals. Mexico’s fruit and vegetable costs surged 9.53% alone.

The consumer price readings underscore challenges facing Latin American policymakers as they calibrate future interest rate cuts. Most of the region’s major inflation-targeting central banks have already begun reducing borrowing costs, while Mexico has signalled it will mull the start of its own easing cycle. Still, more expensive food represents a risk in many nations, with crops under threat of floods and droughts sparked by the El Nino weather pattern. 


Inflation Blame

Brazilian policymakers led by Roberto Campos Neto have lowered the benchmark Selic by a half-point in each of their past five meetings and have pledged to keep that pace for at least the next two. Global food and energy prices are showing some stability, Campos Neto said at an event on Tuesday. 

Still, El Nino has returned with a vengeance in the South American summer, unleashing torrential rains in parts of the country and leaving others uncommonly dry. Rice and potatoes are among the most affected crops.

Mexico’s central bank, known as Banxico, is broadly expected to hold borrowing costs steady later on Thursday before delivering its first reduction in March. Governor Victoria Rodriguez has said the institution will consider rate cuts in coming months, with board members underscoring they should be gradual.

Tomato prices drove almost half Mexico’s monthly cost-of-living increase in January, driven by El Niño and climate change, said Barclays Plc chief Latin America economist Gabriel Casillas. Still, policymakers have gotten some respite, given the impact of closely-watched core inflation on overall price growth is back to pre-pandemic levels, he said.

Chilean policymakers slashed their interest rate by a full percentage point last week while one board member voted for an even more aggressive reduction of 125 basis points, initially whetting bets of another acceleration in easing. Still, swap rates rose in Thursday trading, as today’s report and the implementation of a new consumer price index could limit near-term policy flexibility.

Elsewhere in the region, Colombian central bank Governor Leonardo Villar emphasised the need for caution in domestic interest rate cuts, saying that El Niño still poses risks. 

For Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, food price pressures are a commonality throughout the region. “El Niño is to blame in all of these countries.”

by Andrew Rosati, Matthew Malinowski and Max de Haldevang/Bloomberg

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