Emerging Markets | FX | Monetary Policy & Inflation
Inflation Is Back, At Least In EM
- By Caroline Grady
- 4 min read
Parts of emerging markets are starting to see rising inflation. This is the result of earlier currency depreciation, supply-side disruptions and rising food and energy prices. Because of this, many EM central banks are starting to put the brakes on further easing. Two EM central banks have even hiked rates. And with US yields set to remain anchored at very low levels for years ahead, EMFX should benefit.
Grouping EM by Inflation Trends
Inflation trends across emerging markets (EM) are difficult to generalize given large differences in economies, but the COVID pandemic has seen three groupings emerge (Table 1). The first group is most interesting because accelerating inflation has the most significant implications for monetary policy. It contains some of the usual suspects like India, Mexico and Turkey, but also Poland and Hungary. Meanwhile, others like South Africa and Indonesia don’t feature.
Food Matters
A big reason for the inflation in these countries is the rise in inflation in the food component of CPI, as well as the recent turnaround in energy prices. Rising food prices are impacting wider government policy, with Brazil’s President Bolsonaro recently urging supermarkets to reduce profit margins on basic foodstuffs. This follows an earlier suspension of import tariffs on rice. Given the larger weight of food prices in EM inflation baskets versus DM (Chart 2), this is a key reason why the rising inflationary pressures have been concentrated in EM.
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