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  • Emerging Markets Debt Daily

    EM Inflation – Getting Hot in Here?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    February 16, 2021

    EM inflation relatively low compared to the recent history, but price pressures are on the increase in many places. This reinforces the market expectation of gradual policy normalization across EM.

    January’s inflation tally for Emerging Markets (EM) is pretty much complete, and it shows that upside surprises are on the rise. Reasons vary, and they include higher food and energy prices, emerging demand-side pressures, and higher regulated prices (these remained frozen during the pandemic). The recent studies suggest, however, that credible policies helped to lower the exchange rate-inflation pass-through in EM, limiting the impact of depreciations on domestic prices. Importantly, inflation remains low relative to the recent history (see chart below), reducing the pressure on central banks to respond aggressively in the near term.

    Still, the process of policy normalization in EM is underway. And it is fully reflected in the market’s rate expectations. There are only two countries where the market sees room for rate cuts in the next 12 months – Mexico and Turkey. The list of countries where the market prices in at least 15bps of hikes over the same period is getting longer by the day. It now includes Chile, Brazil, and Colombia in LATAM, Russia, Hungary, Poland, Czech Republic, Romania, and South Africa in EMEA, and China, India, South Korea and the Philippines in Asia.

    EM overseas remittances are alive and well - and doing much better than expected just several months ago. Countries like the Philippines – where remittances were flat in 2020 – are exceptions. Remittances in most countries in our sample posted either high single-digit or double-digit growth during last year. While these inflows might be more volatile than, say, foreign direct investments, they nevertheless provide much-needed short-term support for domestic consumption and external balances – especially in lower-income EM.

    Charts at a Glance: Measuring Inflation “Temperature” in EM


    Source: VanEck Research, 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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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