Inflation in Latin America surprises 67% of the time – 03/05/2024 – Market

A recent study prepared by Itaú BBA shows a correlated movement in inflation between the main economies of Latin America, which shows a price trend in the region, which serves as an indication for the next data that will be released.

According to the survey, when price variations for consumers in a Latin American country surprise the market (up or down), this usually tends to be repeated in other nations in the region.

The study, which covers an analysis period that runs from February 2019 to January 2024, shows that, on average, inflation published in Latin America surprises the market in 67% of publications.

This is equivalent to saying that, most of the time, prices deviate by at least 0.05 percentage points more or less in relation to the median of market inflation projections.

In Brazil alone, inflation data surprised the market 58% of the time.

The survey excludes Argentina, as the country has had uncontrolled prices for some time amid the economic crisis in which Argentines live.

Just for comparison purposes, in Europe, the rate of market surprises with inflation data is 22%. In the United States it is at 85%, but largely because of the shock caused by the pandemic, which caused the country to have the highest inflation rates in 40 years.

According to economist Julia Passabom Araujo, an analyst at Itaú BBA, there had long been a perception in the financial market that inflation in Latin American countries moved in a similar way and the study confirmed this feeling.

“I think everyone who is in the financial market, when inflation data starts to come out — in the case of Brazil, we look at the IPCA [Índice de Preços ao Consumidor Amplo]—, and they are rising above expectations in Chile and Colombia, for example, everyone says: ‘It’s going to rise here too’. Our idea then was to check this in the data and not just remain anecdotal”, says Araujo.

The economist states that the joint surprises in the region in relation to prices occur due to shocks that affect countries as a whole, as is the case with the El Niño climate phenomenon now.

She also mentions exchange rate variation, as Latin American currencies tend to appreciate or depreciate against the dollar in a uniform movement most of the time.

Surprises happen, then, when these climatic or macroeconomic shocks in the region are underestimated or overestimated by analysts. The same applies to forecasts for the exchange rate.

The correlation between the dollar and inflation was only broken during the pandemic shock within the study’s analysis base. In 2022, for example, amid soaring prices in several countries around the world due to mismatches in the global supply chain, inflation jumped, but local currencies did not follow suit.

Araujo also attributes these deviations in prices in relation to those projected by economists in Latin America to the methodologies used in the region.

“These countries have somewhat similar inflation baskets, which give a lot of weight to, for example, food and energy, which are very volatile items. So, analysts have to forecast at the comma, each month, and it ends up being difficult to have a great assertiveness”, says the analyst.

As a consequence of surprises regarding inflation, economists in the region have to constantly review their forecasts not only for prices, but also for interest rate decisions by central banks and, consequently, for the country’s economic growth.

According to the Itaú BBA study, Brazil is the Latin American country with the lowest average and median of surprises, both at 0.1 percentage point. The country with the most frequent projections in accordance with published prices is Mexico, where only 45% of inflation data surprises the market.

In January, Brazil’s official inflation, measured by the IPCA, slowed to 0.42%. But the expectation of analysts consulted by the Bloomberg agency was for a smaller variation, of 0.34%. The deviation, therefore, was 0.08 percentage points.

Chile, on the other hand, is the country with the biggest inflationary surprises, with an average error of 0.24 percentage points and a median of 0.2 pp. In the neighboring country, economists are surprised in 83% of releases.