Surging food prices test LaAm’s top central banks

Bloomberg

Inflation sped up more than forecast in Mexico and Brazil as unrelenting food price increases defy central bank plans to support virus-ravaged economies with low interest rates.
Mexico’s consumer prices rise further above the official target range in October as fruit and vegetable costs soared, according to data, while food costs drove Brazil’s fastest inflation rate for that month since 2002. Those trends may complicate a final rate cut in Mexico this week while prompting greater caution among Brazilian policy makers who are looking to avoid rate
increases at all costs.
Latin America’s largest economies have put monetary policy at the center of plans to return to revive growth following historic recessions. Both countries are still grappling with headwinds including weak labour markets and an uneven recovery. In Brazil, central bankers are standing by views that the food price surge is temporary, while Mexican officials have said space for additional easing is limited.
“We have seen inflation accelerate across the region mostly due to higher food prices,” said Marco Oviedo, chief Latin America Economist for Barclays Capital Inc. “Although that could raise some concerns, we do not expect central banks to react immediately as the economies are still in a process of recovery.”
In Mexico, food and vegetable prices spiked 16.2% in the past year, compared to headline inflation of 4.1%, according to the national statistics agency. In Brazil, prices of common goods such as rice and tomatoes posted double-digit price surges in October alone.
To be sure, parts of Latin America were spared from the inflation pain. Colombia’s consumer prices hit the lowest level in over six decades in October after a slump in demand, while Ecuador also posted deflation on the month.
Still, there are signs that investors are wary of the inflationary pressures. Even though Mexico’s economy is expected to contract nearly 10% this year, five of 20 analysts in a Bloomberg survey see policy makers halting their easing cycle this week with rates left at a four-year low.
“Negative supply shocks are winning the day over weak demand in Mexico and that limits room to cut,” said Carlos Capistran, a New York-based economist with Bank of America Corp. “We expect Banxico to remain on hold this week.”
Economists surveyed by Brazil’s central bank have lifted their inflation forecasts for both this year and next for three straight weeks, according to weekly survey released on Monday. Interest rate futures show traders expect borrowing cost increases as soon as early 2021, also due to growing fiscal risks from a burst of government spending during the pandemic.
Elsewhere, Chile’s inflation unexpectedly accelerated in October as the easing of virus lockdowns fueled demand and prices of items ranging from food to clothing. For the same month, Argentina will likely report the biggest jump in consumer prices since March in data to be released on Thursday, according to analysts in a Bloomberg survey.