Inflation Front and Center

EM Asia inflation Pressures, Policy Reaction

Upside inflation surprises in several Asian economies caught our attention yesterday evening. The numbers might still look “low” compared to peers in EMEA or LATAM – Thailand‘s prices rose by 5.73% year-on-year, South Korea’s by 4.1% year-on-year, and Philippine by 4% year-on-year. However, when we express headline inflation in standard deviations vs. 5-year history, the picture looks more pressing, especially in South Korea (2.6 standard deviations higher) and Thailand (3.75 standard deviations higher) - these are on par with LATAM! Rising inflation pressures signal that the region might no longer be able to stay on the sidelines (=unchanged policy rates), when the rest of the world is frontloading rate hikes.

LATAM Local Bonds' Outperformance

LATAM has been raising policy rates quite aggressively in the past months, and the improved policy cushion contributed to local bonds‘ year-to-date outperformance. The region outranked all other emerging markets (EM) (with the sole exception of South Africa, see chart below), which is why we are watching the recent changes in central banks’ response functions (smaller than expected rate hikes in Chile and Colombia) with a great deal of interest. This weeks big inflation data dump – Colombia later today, Chile, Mexico, and Brazil later this week – will show whether this relatively dovish policy stance is justified.

Food Prices and Social Protests

In a more concerning development, we are seeing more reports about anti-inflation protests in EM. The Peruvian president was forced to declare a curfew on Tuesday (in the capital) after the protests spread and turned violent. These reports came on the heels of social unrest and the government‘s resignation in Sri Lanka, and the dissolution of Pakistan’s National Assembly. Other vulnerable countries which are highly dependent on wheat exports from Russia and Ukraine – like Tunisia – are working very hard to get supplies from alternative sources (and arrange financing) to avoid the repetition of the Arab Spring. Stay tuned!

Chart at a Glance: LATAM Local Bonds On A Roll