Mexico and Brazil, the two largest economies in Latin America, might look quite similar to foreign eyes. In fact, they couldn’t be more different. Take inflation behavior in the first quarter of 2010. Inflation expectations worsened in Mexico as they did in Brazil. Mexicans are dealing with around 6,5% versus a target of 4,5% in Brazil.
Most of Mexico’s recent inflation pressure stemmed from non-core items, which climbed 1.66% mom in March (6.5% yoy) on both food and administered prices. Food costs were the main culprits, with weather-related problems still weighing on produce prices. It appears that growth dynamics appear to still be driven by external demand rather than domestic factors. Quite different from Brazil’s case.
In Brazil, as Itau pointed out: the temperature keeps rising in the inflation front.
The Brazil’s official consumer inflation index (IPCA) came in at 0.52% mom in March, close to the consensus of 0.50%., but yet quite high. The year-on-year IPCA climbed to an eleven-month high of 5.2% , against 4.8% in February. It indicates that inflation is moving away from the 4.5% mid-target.
Mexican Central Bank (Banxico) of course is monitoring inflation, as our BACEN is. They are specially worried about the higher persistence of the one-off price shocks that hit the economy early this year. A wide-open output gap and now a more favorable FX rate dynamics could eventually help authorities normalize real interest rate with lesser (nominal) hikes.
Considering interest rates in the US and Europe, inflation plays an important role to the cost of capital in these two countries. U.S. interest rates are near zero and 1 percent in the euro-zone. The key lending rate in Mexico, is 4.5 percent while Brazil’s inflation- adjusted interest rate is 3.9 percent.