(Bloomberg) -- Brazil’s and Mexico’s inflation accelerated above expectations in early October as a spike in prices of volatile items such as energy and food complicates the outlook for monetary policy in Latin America’s largest economies.
Official data released Thursday showed Brazil’s consumer prices rose 4.47% from a year prior, more than the 4.43% median estimate of economists surveyed Bloomberg. Mexico’s annual inflation sped up to 4.69% in the same period.
A 5.29% surge in residential electricity bills and a 0.87% rise in food and beverages drove Brazil’s inflation in the first two weeks of October. In Mexico, energy costs jumped by 2.25% in the period while fruits and vegetables gained 1.94%.
Policymakers in both nations have been struggling to bring inflation down to their 3% targets. Still, Mexico’s central bank is cutting its benchmark interest rate as closely-watched core prices — which exclude volatile items — have been rising at a slower pace. Brazilian policymakers are moving in the opposite direction, tightening monetary policy amid a resilient economy, rising public spending and worsening inflation expectations.
“The upside surprise from Brazil’s headline inflation was also accompanied by worse core and services components, thus confirming inflation worries,” said Dan Pan, an economist at Standard Chartered Bank.
Amid Brazil’s worst-ever drought, regulators have been hiking energy prices to compensate for low water levels at hydroelectric power plants that supply about two-thirds of the country’s electricity.
Brazil’s central bank is already tightening monetary policy to cool demand and clamp down on price pressures. Borrowing costs stand at 10.75% after last month’s quarter-point hike, and traders see them surpassing 13% next year.
Service inflation is simmering and investors are worried about growing government expenditures under President Luiz Inacio Lula da Silva, contributing to the real’s weakening in recent weeks.
Core Inflation
Banxico, as Mexico’s central bank is known, lowered rates by a quarter-point to 10.5% last month. In the minutes to that decision, policymakers wrote that external factors like a slowdown in the US economy, as well as Mexico’s own activity sluggishness, should allow the bank to ease again at its Nov. 14 decision.
Mexico’s closely-watched core inflation, which excludes volatile items such as food and fuel, slowed just slightly in early October, standing at 3.87% compared to the year prior. That figure was down from 3.88% before.
“What’s most important is that core inflation pressures remain under control,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, said regarding Mexico’s consumer price report. “The economy’s weakness, the loss of strength in the labor market and restrictive monetary policy are creating a picture that shows Mexico’s inflation is under control.”
Indeed, in August Banxico cut its economic growth forecast for 2024 to 1.5% from a prior estimate of 2.4%, and to 1.2% from 1.5% for 2025. Brazilian policymakers moved in the opposite direction in September, raising their own 2024 projection for the third time, to 3.2%.
Going forward, central bankers in both nations will face heightened global uncertainty, most notably from the Nov. 5 presidential elections in the US.
“We are in a global economic period with political risk in the US and the Middle East which weigh on emerging market assets and add uncertainty,” Abadia said. “And when considered on top of climate change shocks and local issues, they will make central bankers be much more cautious than expected.”
--With assistance from Giovanna Serafim, Josue Leonel and Rafael Gayol.
(Recasts story to add Mexico’s data, economist comments.)
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