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Latin America’s Inflation Progress Tempered by Soaring Food Price Pressures

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(Bloomberg) — 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.

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Annual inflation in Brazil unexpectedly ran above the central bank’s tolerance range, at 4.51%, while Chile consumer prices rose past estimates, hitting 3.8% from a year ago, according to data published Thursday. Mexico’s cost of living increased 4.88% 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% 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 began reducing borrowing costs, while Mexico has signaled 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.

What Bloomberg Economics Says

Food, mainly fresh produce, rose in Mexico, Chile and Peru, so that is contributing to inflation. The results support concerns about potential additional upward pressure from El Nino, a risk policymakers have acknowledged. Food inflation is only a big concern when it risks contaminating prices of other goods and services or inflation expectations.

— Felipe Hernandez, Latin America economist

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.

Read more: Lula Gets New Nemesis in Inflation Fight as El Nino Brings Rain

What Bloomberg Economics Says

“An uptick in underlying inflation and some pressure in service prices in the January CPI report should keep Brazil’s central bank from accelerating its 50-basis-point rate-cut pace.”

— Adriana Dupita, Brazil and Argentina economist

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Mexico’s central bank, known as Banxico, is broadly expected 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 Nino 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.

Read more: CHILE INSIGHT: New CPI Points to Higher Inflation Volatility

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

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

–With assistance from Giovanna Serafim, Rafael Gayol and Oscar Medina.

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