Inflation Front and Center

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation


Rising inflation pressures in EM Asia signal that regional central banks might need to tighten sooner than expected. Peru declares a curfew in response to anti-inflation protests.

EM Asia inflation Pressures, Policy Reaction

Upside inflation surprises in several Asian economies caught our attention yesterday evening. The numbers might still look “low” compared to peers in EMEA or LATAM – Thailand’s prices rose by 5.73% year-on-year, South Korea’s by 4.1% year-on-year, and Philippine by 4% year-on-year. However, when we express headline inflation in standard deviations vs. 5-year history, the picture looks more pressing, especially in South Korea (2.6 standard deviations higher) and Thailand (3.75 standard deviations higher) – these are on par with LATAM! Rising inflation pressures signal that the region might no longer be able to stay on the sidelines (=unchanged policy rates), when the rest of the world is frontloading rate hikes.

LATAM Local Bonds’ Outperformance

LATAM has been raising policy rates quite aggressively in the past months, and the improved policy cushion contributed to local bonds’ year-to-date outperformance. The region outranked all other emerging markets (EM) (with the sole exception of South Africa, see chart below), which is why we are watching the recent changes in central banks’ response functions (smaller than expected rate hikes in Chile and Colombia) with a great deal of interest. This week’s big inflation data dump – Colombia later today, Chile, Mexico, and Brazil later this week – will show whether this relatively dovish policy stance is justified.

Food Prices and Social Protests

In a more concerning development, we are seeing more reports about anti-inflation protests in EM. The Peruvian president was forced to declare a curfew on Tuesday (in the capital) after the protests spread and turned violent. These reports came on the heels of social unrest and the government’s resignation in Sri Lanka, and the dissolution of Pakistan’s National Assembly. Other vulnerable countries which are highly dependent on wheat exports from Russia and Ukraine – like Tunisia – are working very hard to get supplies from alternative sources (and arrange financing) to avoid the repetition of the Arab Spring. Stay tuned!

Chart at a Glance: LATAM Local Bonds On A Roll

Chart at a Glance: LATAM Local Bonds On A Roll

Source: Bloomberg LP

Originally published by VanEck on April 5, 2022.

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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