Inflation in Mexico reaches 21-year high; in Brazil, prices fall after Bolsonaro’s measures

Mexico’s inflation accelerated broadly in line with analysts’ estimates in July at the fastest pace since early 2001, while the central bank is expected to announce a second consecutive 75 basis point increase to its key interest rate this week.

Consumer prices rose 8.15% last month from a year earlier, slightly faster than the median estimate of economists surveyed by Bloomberg of 8.14%, the National Institute of Statistics and Geography (INEGI) reported Tuesday.

In the monthly comparison, inflation slowed from 0.84% in July to 0.74%, versus the median economists’ estimate of 0.73%.

Core inflation, which excludes volatile items such as fuel, was 7.65% in the same period, above analysts’ median estimate of 7.61%. Inflation has continued to rise despite nine consecutive rate hikes by the central bank for a total of 375 basis points since June last year.

The figures remain worrisome, said Janneth Quiroz Zamora, deputy director of economic analysis at Monex Casa de Bolsa. “They keep rising despite the moves that have already been made since June last year by the [Central] Bank of Mexico,” she added.

The 22 analysts surveyed by Bloomberg estimate the Mexican central bank, known as Banxico, will raise rates by 75 basis points on Thursday. The bank targets inflation of 3%, plus or minus one percentage point.

Last month’s 75 basis-point hike was the most considerable increase since Banxico began targeting a key rate in 2008. The bank’s board, headed by Governor Victoria Rodriguez, said it intends to keep raising the benchmark rate and will take the same forceful measures if conditions warrant.

“Banxico will be concerned about the big core reading. We expect a 75 basis point increase on Thursday with a 100 basis point increase in risks,” said Carlos Capistrán, Bank of America’s chief economist for Mexico and Canada.

The government has cut 2.6 percentage points off headline inflation by spending about US$28 billion this year on measures to control prices, including a fuel subsidy and a price pact with major food producers. The government began reducing spending on fuel subsidies last month as U.S. gasoline prices fell more than 30% from their June peak.

According to a Citibanamex survey released last week, economists forecast inflation to end the year at 7.74%, up from an earlier estimate of 7.68%, with the benchmark rate at 9.5%.

Mexico’s economy exceeded analysts’ expectations in the second quarter, with a growth of 1% versus the previous three months. Gross Domestic Product (GDP) has not yet recovered to pre-pandemic levels.

Latin America’s central banks helped prevent a currency crisis by initiating sharp rate hikes last year, which also helped contain inflation by as much as two to three percentage points, Bank for International Settlements head Agustin Carstens told Bloomberg News in June.

The region’s major economies have struggled to keep prices down as Russia’s invasion of Ukraine in late February has pushed food and energy costs ever higher and as supply chain problems that have persisted during the pandemic continue to affect business.

Brazil’s consumer prices posted the biggest drop in July since 1980 after President Jair Bolsonaro cut utility taxes to control the rising cost of living and boost his re-election chances.

Official data released Tuesday showed consumer prices fell 0.68% in the month, more than the median estimate of a 0.65% drop by analysts surveyed by Bloomberg. It was the most significant monthly decline since the data series began in 1980. On a year-over-year basis, prices were up 10.07%.

With the general election less than two months away, Bolsonaro has put the full weight of his office on easing economic woes and regaining ground against his leftist rival, Luiz Inácio Lula da Silva. Polls show that Brazilians widely blame the president for double-digit inflation and that Lula would score a victory.

At the same time, Brazil’s central bank raised the benchmark rate 11.75 percentage points from March 2021 in response to a series of shocks due to food and fuel prices. Monetary policymakers have signaled that they will consider a final increase in September.

Overall, those efforts are starting to pay off, as annual inflation cooled from 11.89% in June. Prices remain well above targets of 3.5% and 3.25% for this year and next year, respectively.

Bolsonaro’s anti-inflation measures included caps on gasoline and electricity taxes, while Congress approved billions of dollars in cash assistance for the poor.

It is unclear how much the aid will boost Bolsonaro’s standing among voters. Economists warn that it risks raising prices in the long run.

With information from La Tercera