Peak Inflation – “Nothing Else Matters”?

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


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

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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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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