If you don’t mind, turn your gaze away from Asia and from Egypt, and pay special attention to South America this week.
The continent is home to a slew of fresh inflation data — data that will fee directly into policy choices from the region’s central bankers.
So what’s on the docket?
Here’s a table from Citigroup. Note that Colombia already came out, coming in at 0.9%, basically right in line with expectations.
Brazil and Chile tomorrow are obviously big, though most likely they won’t get much attention from the media.
In a separate note, Citi’s Belén Olaiz takes a deeper dive into the Chilean situation:
While some analysts see similarities between the current growth-inflation cycle and that of 2007-08, we believe this time inflation might be harder to control. During the 2007-08 expansion, inflation went up rapidly in Chile (it reached a high of 9.8% in October 2008), something that motivated the Central Bank (CB) to aggressively hike rates, taking the policy rate from 6.25% in May 2008 to 8.25% by September 2008. Furthermore, inflation was then evenly distributed between tradable and non-tradable prices, with both running at around 9-10% in annual terms. This time, however, the picture is somewhat different. Since current inflation is mostly driven by increases in the non- tradable sector (6.4% vs. a 0.4% drop in tradable), it might be tougher for the CB to fend-off inflation, since the non-tradable sector includes prices that tend to be stickier than volatile tradable commodities. Besides, the domestic growth picture is also different this time. During the nine months to September 2008, GDP growth in Chile averaged 4.4%, whereas during the nine months leading to November 2010, it has averaged 6.5%. Thus, our concern is that this time inflation might be more embedded than during 2007-08 (See Figures 1 and 2).
We have thus revised upward our 2011 CPI inflation forecast to the upper limit of the target band of 4.0% from 3.4% before. Several factors, both domestic and external, support our upward revision: (1) the pickup in food inflation, which represents almost 30% of headline CPI; (2) a slight peso depreciation against the dollar in the short tem should make tradable inflation go up, after decreasing 0.4% year over year in 2010 anchored by peso strength; (3) the lift up in inflation expectations – market analysts now see inflation at 3.8% in twelve months and at 3.4% in two years; and (4) robust economic growth (we expect GDP to still be 0.6% above potential by the end of the year).
Higher growth and inflation dynamics should lead the CB to hike its benchmark rate to 5.50% by year-end. We run our Chilean macro econometric model to anticipate future moves by the central bank.1 The model consists of a series of equations, each of them modelling fundamental domestic variables (output gaps, domestic inflation, short-term interest rates) and exogenous variables (global growth, commodity and food price inflation, etc) that are then simultaneously solved forward to produce forecasts. Figure 3 and 4 plot the inflation and interest rate forecasts produced by the model up to December 2011. Annual inflation is forecasted at about 4.0% and the policy rate is expected to be at around 5.50%, suggesting that the CB will have to raise rates by 225bp in the next 11 months, more than the 200bp we were expecting before.
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