Inflation in Latin America converges to focus on solely in 2024, examine reveals

Inflation in the main Latin American countries is close to peak and should start a slow process of deceleration from the last quarter of 2022, but it will only converge to the targets pursued by the region’s central banks in 2024. The assessment is contained in a report by XP Investments, obtained exclusively by the Estadão/BroadcastGrupo Estado’s real-time news system.

Between this year and the next, the broker estimates a slowdown in inflation in Brazil (5.6% to 5.2%), Mexico (8.3% to 5.3%), Colombia (12.0% to 6.5 %) and Chile (12.5% ​​to 5.6%). This process should be driven by an improvement in global supply chains, correction of commodity prices and monetary tightening in developed economies.

“We are beginning to follow signs not only in Latin America, but throughout the world of a reversion to a disinflation process,” says XP economist Francisco Nobre, one of the authors of the study. “This should gain traction especially next year, but it should be a slow process. It has second-order effects that are still being reflected in inflation.”

In XP’s accounts, ocean freight costs have dropped by about 75% since the start of 2022, which suggests improving global supply chains. Commodity price corrections also contribute to disinflation.

The monetary tightening led by the Federal Reserve (Fed, the central bank of the United States) is also one of the vectors of relief for inflation in Latin America, due to the potential to slow down the global economy. The broker’s scenario considers a final rate of around 4.5% for Fed Funds, although the risk is of a more intense increase in interest rates.

“The Fed is raising rates at a much faster pace than they have in other cycles, heading for a fourth 0.75 percentage point increase, something that has never been done before,” says the economist, who sees the risk of a “excessive tightening” of US interest rates. “What they’ve been signaling is that they’re more worried about going down than up.”

In the transition from 2022 to 2023, XP expects a slowdown in the Gross Domestic Product (GDP) of Brazil (2.8% to 1%), Mexico (2.2% to 1.5%) and Colombia (8% to 1, 6%), in addition to a moderate recession in Chile (2.1% to -0.5%), although Nobre acknowledges that the risk is of a stronger global slowdown and, consequently, lower numbers in the region.

Inflation and Interest

Despite the risk of a more intense global monetary tightening, XP notes that Latin American central banks already seem to be reaching the end of their interest rate increase process. According to Nobre, the region’s countries began to raise rates earlier and seem committed to maintaining a strong pace of tightening, in order to guarantee inflation convergence.

The broker assesses that the monetary tightening has already come to an end in Brazil, with the Selic rate at 13.75%, and in Chile, after the 0.5 percentage point increase in interest rates announced last Thursday, at 11.25 %. In Colombia, XP expects a last 1 point hike in October to 11%, while Mexico is expected to raise interest rates by 0.75 point in November and 0.25 point in January 2023, to a final level of 10, 75%.

XP sees room for monetary easing in the region’s countries to start in the second half of 2023.

The information is from the newspaper. The State of São Paulo.

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