Mexico, Brazil, Indonesia and India are the first markets that have entered a stage of stagflation. This means that they maintain structural and consistent inflationary pressures even with slow economic activity, explained economists from the Institute of International Finance (IIF).
Stagflation can quickly turn into a much more serious stability crisis, capable of fueling the impoverishment of many people, German Finance Minister Christian Lindner warned separately, warning that stagflation is a real risk also for his country, Germany. .
Within the analysis entitled “Stagflation of Emerging Markets”, IIF economists highlighted that among the four emerging markets that are already in stagflation, Mexico and Brazil present the most pronounced evidence of weakness in economic activity and production since before the pandemic, this in 2019.
The shock of the health emergency and the unprecedented global economic confinement surprised Mexico when the Gross Domestic Product (GDP) was at -0.2% and Brazil’s at 1.2%.
The economists of the IIF, which associates the largest number of financial institutions operating in the world, stated that inflation has skyrocketed throughout the world, that price pressure is genuine and that the impulse of underlying inflation is high in all emerging markets.
This means that the upward pressure on prices goes well beyond the contribution of food and energy that have skyrocketed as an effect of Russia’s war against Ukraine, as it also has a strong boost in large domestic supply shocks.
However, he believes that if supply shocks ever abate, emerging market inflation could cool faster than expected.
The effect of wage increases
Economists from the International Monetary Fund detailed, last week, that inflation in Latin America also showed the impact of domestic factors such as salary increases and indexation practices, automatic adjustments of contracts with respect to the general price trend.
Underlying, pressured since May 2020
According to the IIF analysis, inflation has increased considerably in emerging markets and has reached above 6% in recent months, a level well above central bank targets.
But they noted that core inflation is above target in most countries. This indicator is a reference for future inflation in a period of six months, as explained by the economist of the Saver think tank, Luis Pérez Lezama.
Core inflation measures the increase in the prices of goods and services that are not usually affected by seasonality or volatility. It is also identified as structural inflation.
In the case of Mexico, it adds 16 fortnights to the rise, after registering an annual variation of 7.2% at the cutoff of the first two weeks of April and remains a source of concern for some of the members of the Board of Governors of Banco de México, such as Deputy Governors Irene Espinosa and Jonathan Heath.
The case is similar in Brazil, whose underlying inflation stood at 9.22% annually in March this year, and completed 11 months outside the central bank’s target of 3.5 percent.
The IIF mentions, in its report, excessive warming in the cases of Chile and Colombia, which show strong economic activity and high levels of inflation.
The war, additional pressure
According to the IIF analysis, developed by the institute’s economists Sergi Lanau and Jonathan Fortun, “energy and food prices may remain high and not decline even if the situation in Ukraine improves.”
The Covid-19 crisis interrupted supply chains, Russia’s war in Ukraine put pressure on food and energy prices, fueled exchange rate volatility and is generating more supply shocks, they detailed.
The German minister warned that the country’s economy risks contracting 2% if the conflict between Russia and Ukraine intensifies and if restrictions on Russian products put pressure on the supply of services.