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  • Emerging Markets Debt Daily

    EM Inflation - Low but Showing Risks

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 04, 2021

    The near-term outlook for EM inflation is mostly benign, but regulated prices, minimum wage increases, and higher commodity prices point to upside risks. Currency appreciation creates policy challenges in parts of EM.

    The latest inflation releases across Emerging Markets (EM) [Philippines, Thailand, and Indonesia] were in line with the predominant narrative of accelerating but low inflation (with some notable exceptions like Turkey). Large output gaps and weak labor markets suggest that the inflation outlook in EM should remain benign for now. One big concern, however, is that these very considerations can encourage sizable regulated prices and minimum wage increases, which can create pockets of persistent price pressures in the coming months. We also keep an eye on food and commodity prices, which are up by about 10% year-on-year (see chart below) - these are often the largest components in EM inflation baskets.

    A combination of low-ish inflation and a strong currency is creating a major policy headache for Poland’s central bank (NPB). The governor described the appreciation pressures as “very disturbing and very harmful”, promising to use “decisive” interventions on the currency market. Apparently, December’s interventions did not have the desired effect, and the question now is just how “decisive” the central bank can be. The Czech National Bank’s imposition of a currency floor several years ago definitely comes to mind.

    China’s decision to ease some restrictions on the use the yuan in international transactions should be considered in a context of the currency’s nearly 10% appreciation against the U.S. Dollar since the end of May 2020 (according to Bloomberg LP). The changes are not huge – fundamentals such as China’s current account surpluses and large growth (and sometimes interest rate) differentials suggest that there is room for additional currency strength. But the new rules may help to slow the speed of appreciation and introduce some volatility on the currency market.

    Chart at a Glance: EM Inflation – Pay Attention to Higher Commodity Prices

    Chart at a Glance: EM Inflation – Pay Attention to Higher Commodity Prices

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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