Latest rise in food inflation should prove short-lived

Food inflation has risen further in several economies in Latin America over the past month. The increase has been especially sharp in Brazil and Colombia, but food inflation has also edged up in Chile. The subsequent upward pressure on headline CPI inflation will be a cause for concern among policymakers, and will push back the timetable for interest rate cuts in Brazil yet further. But we think the latest rise in food inflation will ultimately prove short-lived. The most recent rise reflects a combination of factors including poor harvests, the effect of El Niño, and the pass-through from last year’s currency sell-off (which has pushed up the price of imported food). However, in each case the upward pressure on food inflation should soon start to unwind. Leading indicators suggest that by Q4 of this year food inflation should start to ease, which should pull down headline inflation too. We expect interest rates to be lowered in Brazil in November and think that rate cuts could be possible in Colombia by the first quarter of next year.