Brazil & Mexico Consumer Prices (Aug.) - Capital Economics
Latin America Economics

Brazil & Mexico Consumer Prices (Aug.)

Latin America Data Response
Written by William Jackson
Cancel X

Brazilian inflation remained well below the central bank’s target last month, at 2.4% y/y, confirming that price pressures are soft and supporting our view that the Selic rate will stay low for a long time. Elsewhere, the rise in inflation in Mexico last month, to 4.0% y/y, might reinforce Banxico’s increasingly cautious stance, but we still expect further monetary easing (including a 25bp cut at its meeting later this month).

Inflation rises, but central banks won’t be too alarmed

  • Brazilian inflation remained well below the central bank’s target last month, at 2.4% y/y, confirming that price pressures are soft and supporting our view that the Selic rate will stay low for a long time. Elsewhere, the rise in inflation in Mexico last month, to 4.0% y/y, might reinforce Banxico’s increasingly cautious stance, but we still expect further monetary easing (including a 25bp cut at its meeting later this month).
  • The outturn in Brazil was in line with the consensus expectations (but a bit below our own forecast of 2.6% y/y) and was up modestly from 2.3% y/y in July. (See Chart 1.) Inflation is well below the BCB’s 4% target. The breakdown of the data showed that the rise was largely a result of higher food inflation (see Table 1), which hit its highest rate in close to four years. Higher global oil prices pushed transport inflation up too.
  • Inflation in most other categories of the CPI basket remained soft last month. And with the economic recovery likely to lose momentum from here on, core inflation should remain subdued. Recent suggestions that the government will cut import tariffs on food products may also help to soften inflation pressures.
  • Against this backdrop, Copom won’t be in any rush to raise interest rates. We expect the Selic rate to remain at its current record low of 2.00% into 2022. (See here.) Investors, in contrast, are pricing in monetary tightening from early next year.
  • Elsewhere, Mexican CPI data for August (released earlier today) were a bit more worrying than the figures for Brazil. The headline rate and core inflation both stand at 4.0%, above the 3% mid-point of central bank’s target range. That said, like in Brazil, much of this can be pinned on higher food and energy inflation. (See Table 1 again.) Note, too, that Mexico’s core inflation measure also includes some food products.
  • Banxico appears to be increasingly cautious (see here) and these data are likely to reinforce that shift. Nonetheless, we still see scope for a 25bp interest rate cut, to 4.25%, at the meeting later this month. And with inflation likely to soften further ahead, we think the policy rate will reach a floor at 3.75%. (See here.) That’s lower than the trough currently discounted in financial markets.

Chart 1: Brazil & Mexico Consumer Prices (% y/y)

Sources: INEGI, IBGE, Capital Economics

Table 1: Brazil & Mexico Consumer Prices (% y/y)

Brazil

Mexico

Headline

Food & Bev

Housing

Transport

Headline

Core

Food & Bev

Transport

May ‘20

1.9

6.9

1.7

-3.9

2.8

3.6

7.7

-5.3

Jun. ‘20

2.1

7.6

1.7

-3.3

3.3

3.7

7.0

-2.1

Jul. ‘20

2.3

7.6

1.3

-2.4

3.6

3.9

6.4

-0.2

Aug. ‘20

2.4

8.8

0.4

-1.2

4.0

4.0

7.5

0.3

Sources: INEGI, IBGE, Capital Economics


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com