Drop in oil prices unlikely to stop EM tightening

The fall in oil prices over the past couple of months will drag down fuel inflation across the emerging world, but it probably won’t be enough to prompt policymakers to slow the pace of monetary tightening. After all, the impact of weaker fuel inflation on the headline rate is likely to be mitigated by other factors. Food inflation, which tends to make up a greater share of CPI baskets than fuel, is rising across EMs as the effects of favourable harvests in 2017 have started to fade. Moreover, a number of emerging economies are facing mounting capacity constraints and, as a result, core inflation is set to rise further over the next six months or so. All told, aggregate EM inflation is set to strengthen over the same period. The pick-up in inflation, particularly core prices, will be a concern to EM policymakers and supports our view that the tightening cycle we have seen in 2018 has further to run.