Brazil versus Mexico – inflation-wise

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.

Advertisements

About Hildete Vodopives

Hildete de Moraes Vodopives is founder of Brazil Global and of the Harvard Strategists Bureau. She is a member of the Brazilian Investment Analysts Association (APIMEC-Rio) where she served as Corporate Relations Director and later, on the board. Hildete advises companies doing business in Brazil. She lives between Paris and Rio and is a member of the Harvard Club of Paris and of the Mercosur Women’s Forum.
This entry was posted in Brazil, Economy and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s