Inflation peaks in Brazil and Mexico

Having increased steadily over the course of this year, there are signs that inflation in both Brazil and Mexico has now peaked. Data to the middle of November suggest that it should drop back in both countries this month, and further falls seems likely thereafter. In Mexico, the moderation in inflation is likely to be relatively sharp. There remains substantial slack in the labour market and the effect of last year’s indirect tax hikes – which pushed up inflation when they were introduced – will start to fall out of the annual comparison over the coming months. This in turn should pave the way for interest rate cuts to support the economic recovery. In contrast, the moderation in inflation in Brazil is likely to be extremely gradual. Despite the continued weakness of growth, there is little spare capacity in Brazil’s economy, which will keep underlying price pressures high. In addition, government regulated prices, which have been kept low in recent years, will have to rise. All of this will keep inflation above the BCB’s central target for the foreseeable future – meaning further interest rate hikes are likely.