Rising Stagflation Risks in Emerging Markets Amid US Inflation

US Fed Tapering Possibility 'Dollar Strength → Emerging Market Currency Weakness → Emerging Market Inflationary Pressure'
Uruguay July Inflation Rises 7.3%... Brazil, Chile Also Soaring, Stagflation Concerns

[Asia Economy Reporter Byunghee Park] Inflation in the United States is spreading to emerging markets. Rising U.S. prices are increasing the likelihood of tapering (reduction of asset purchases) by the central bank, the Federal Reserve (Fed). This leads to a rise in the value of the dollar and a relative weakening of emerging market currencies → resulting in inflationary pressures in emerging markets. Amid this, concerns about stagflation (economic stagnation accompanied by rising prices) in emerging markets are also growing.

According to Bloomberg News on the 11th (local time), the Central Bank of Uruguay raised its benchmark interest rate from 4.5% to 5.0%. This measure was taken following a 7.3% increase in Uruguay's inflation rate in July compared to a year ago.

Nevertheless, if inflation continues to rise, Uruguay is highly likely to further raise its benchmark interest rate. The Central Bank of Uruguay presented a new inflation control target range of 3-6% for the next two years.

Neighboring Brazil's inflation rate in July also surged to the highest level in five years. The Brazilian Institute of Geography and Statistics announced that consumer prices in July rose 8.99% compared to a year ago. This is more than double the target rate of 3.75%. Month-on-month, prices rose 0.96%, marking the highest increase in 19 years.

The Central Bank of Brazil raised its benchmark interest rate by 1 percentage point at the beginning of this month’s monetary policy meeting. This marks the fourth rate hike this year. The benchmark rate, which was 2% at the beginning of the year, has now risen to 5.25%. Given the current situation, Brazil appears likely to implement another rate hike at next month’s monetary policy meeting.

Adriana Dupita, an economist at Bloomberg, stated, "Brazil’s benchmark interest rate will rise to 7.5% by the end of the year," adding, "I expect additional hikes of 1 percentage point in September, 0.75 percentage points in October, and 0.5 percentage points in December."

Inflation has emerged as a major challenge for the South American economy overall. Mexico and Chile recorded inflation rates of 5.81% and 4.5% respectively in July. Both countries’ central banks have set inflation targets at 3% with an allowable range of plus or minus 1 percentage point, but both have already exceeded the upper limit of 4%.

Mexico will decide its benchmark interest rate on the 12th. Bloomberg expects a hike from 4.25% to 4.5%. If the increase is confirmed as expected, it will be the second rate hike this year following June.

Inflation rates in Africa are also notable. Ghana’s inflation rate surged from 7.8% in June to 9% in July. Food prices, which were 7.3% in June, rose to 9.5% in July, driving up the overall consumer price index. Non-food inflation in July was 8.6%, not significantly different from 8.2% in June. However, Ghana’s inflation rate remains within the central bank’s allowable range. The current maximum allowable inflation rate set by the central bank is 10%.

The U.S. foreign affairs magazine Foreign Policy recently warned that the specter of stagflation is looming over emerging markets.

While advanced countries’ responses to COVID-19 are boosting their growth rates, they are causing capital outflows from emerging markets. This is leading to a weakening of emerging market currencies and fueling inflation in those countries.

Foreign Policy predicted that although the COVID-19 Delta variant may slow the economic recovery in advanced countries, it will not delay the Fed’s monetary policy tightening. The Fed’s tightening is a foregone conclusion, with only the timing remaining uncertain. The magazine also pointed out that the Fed’s decision not to raise interest rates at last month’s monetary policy meeting was fortunate for emerging markets, but that period of relief will not last long.

This content was produced with the assistance of AI translation services.