Inflation Surge in Latin America’s Top Economies
In Brazil and Mexico, inflation has spiked higher than expected in recent weeks, as food and energy costs have added to the burden on policymakers. Driven by multiple domestic and international shocks, ending this turbulence looks unlikely over the near term.
Brazil and Mexico’s Economic Struggles
New data releases show inflation in Brazil, the largest economy in Latin America, and Mexico speeding up. Brazilian consumer prices rose by 4.47 percent yearly, while Mexican prices rose by 4.69 percent. Higher food and energy prices push up inflation in both countries, making it more difficult for the central banks to stabilize the prices of goods.
In Brazil, domestic electricity prices jumped 5.29 percent, and food prices increased by 0.87 percent. The inflation outlook was set to worsen in the face of a biting drought cutting into hydroelectric power supplies. In Mexico, energy prices rose 2.25 percent, while fruit and vegetable prices rose 1.94 percent. From the standpoint of these central banks, the price rises represent the darker face of broader global issues of supply-chain bottlenecks and chaotic commodity markets. Economies in both countries have reached an inflection point, with policymakers deciding if it is more critical to tackle inflation or allow the economy to remain at full throttle.
Brazil Tightens, Mexico Eases
Responding to the brew of inflation, Brazil’s central bank took the unprecedented step of tightening monetary policy to slow demand and tamp down pressure on prices. Brazil’s borrowing rate is now 10.75 percent, following a hike, and it’s expected to rise even further in the next year: some economists think it could peak at 13 percent. The rate hike is a recognition of problems with Brazil’s inflation, which undoubtedly won’t be helped since it’s driven by supply chain problems, high public spending, and drought-induced energy shortages.
Meanwhile, Mexico’s central bank, Banxico, is moving in the opposite direction. Earlier this month, having slowed growth and a cooling labor market in mind, it cut the interest rate by a quarter-point to 10.5 percent. This March decision by Banxico was accompanied by minutes that dwelled on the fact that Mexico’s core inflation, measured excluding food and fuel and commodity prices, is holding steady at 3.87 percent. Mexico’s current stagnation, Banxico seemed to reason, warrants the central bank releasing some of the tight monetary noose, given that Banxico anticipates the inflationary lion will continue its slow retreat.
These different approaches reflect the differing circumstances of each country’s economy. In Brazil, where inflationary pressures are putting pressure on the economy due to fiscal expansion and external factors, the central bank sees the specter of economic sluggishness as a reason to tighten monetary policy. In contrast, the central bank considers the same economic weakness as a reason for financial flexibility in Mexico. However, this divergence between the policies of the two central banks also tells of the delicate balancing act they must both perform.
Global Uncertainty and Climate Pressures Add to Inflation Woes
On top of day-to-day vicissitudes at home, global political risks, the wobbliness of the world economy, climate change, and volatile energy and food prices are crucial uncertainties for Brazil and Mexico. These countries are highly exposed to global energy and food markets, meaning that commodity price shocks – caused by factors such as bad weather in Brazil, Argentina, or the United States production areas – can hit hard. Extreme drought, for instance, has hit Brazil for two years and strained its capacity to generate electricity through hydroelectric energy. Falling water levels in reservoirs due to drought allowed regulators to double electricity prices in Brazil this year when high energy and food costs weigh heavily on Brazilian households and businesses.
Privately, though, external pressures from the US economy and global market uncertainties mean prudence is the watchword. Important sectors of Mexico’s industrial base are heavily integrated into the US. Growth is primary, so policymakers dare not risk destabilizing an urgently needed thaw in relations with the US. Mexican exports to the US make up nearly three-quarters of the total, and unemployment is far more sensitive to growth than inflation. The oil price is the leading global corporate commodity price risk for Mexico, whose oil export balance is negative and whose domestic fuels market is highly dependent on net imports. These factors mean that central bank policy calculations do not assume an inflationary world, but rather that stability, and all the flexibility it demands, is a global affair, buffeted by risks from climate.
The international context is influencing this trend, especially as the US presidential elections approach and tensions escalate in the Middle East. Emerging markets like Brazil and Mexico often depend heavily on shifts in investor sentiment, so their central banks must remain vigilant to these evolving risks.
Balancing Growth and Inflation
Although central bankers in Brazil and Mexico have the same goal of calming up to 15 percent annual inflation while maintaining growth, the path ahead looks more challenging for their counterparts in Brazil. Brazil faces high inflation and a growth story overheating because of a solid fiscal dynamic and an affirmative government with no qualms about spending public money. All this keeps the pressure on the central bank to hike rates. But these increases would risk cooling the economy – stifling growth and hiking borrowing costs, which could restrain household and business spending. Brazil’s challenge here is well-known but complicated: trying to cool inflation without choking the upstream dynamics of the economy. This is particularly tricky when energy costs are rising and fiscal pressures are increasing all along the horizon.
Meanwhile, in Mexico, where Banxico has buried its Tibetan lama, the goal remains to keep inflation in check while letting the economy tick over. Lower interest rates might help in the battle to boost economic activity, but Banxico policymakers will need to be careful about inflationary flareups. The data on core inflation, which takes out strikers and seasonal factors, indicates that Mexico still has some control over price pressures. Any outside shocks, though – such as a US slowdown in economic activity or a rise in prices for global energy – could quickly change the calculus.
Brazil and Mexico will face long-term challenges, including increased risks of climate-driven inflation and evolving global trade dynamics. The resilience of their central banks will be crucial in securing their economies in the future. Maintaining stability is essential for Latin America’s major economies and regional and global economic stability.
Also read: Sheinbaum to Steer Mexico Through Economic and Environmental Crossroads
Brazil and Mexico’s significant struggle against inflation underscores a broader challenge Latin American economies face as they attempt to manage inflation while fostering economic growth in a complex global environment. Central banks will again play a vital role in shaping the future direction of these economies.
