Saxo Inflation Monitor: EMs can accommodate further on the monetary side

In past September, the average inflation in the BRICS + Indonesia was stable at 3.6% YoY. Since 2017, CPI in EMs has been relatively stable, evolving around 3.5% YoY. This period of lower inflation reflects structural changes taking place at the global level, related to new technology, ageing and the accumulation of debt, but also a more efficient monetary policy aimed to contain inflation and lower energy prices.

Looking into details, CPI is falling in South Africa (4.1% YoY), Brazil (2.8% YoY) and Russia (3.9% YoY). On the contrary, we observe higher inflationary pressures in China (3% YoY) and India (3.9% YoY).

Higher Chinese CPI is evidently linked to higher pork prices. According to the Ministry of Agriculture and Rural Affairs, wholesale pork price has increased by 41% since the beginning of October. It seems that the supply decline is much worse than initially expected, which explains the strong jump. Due to the current divergence between PPI (which is in contraction at minus 1.2% YoY) and CPI (which is moving higher), there is little room left for monetary policy in China in the short term. The PBoC can only slightly adjust the parameters of monetary policy as it has done today by cutting the lending facility MLF by 5 pbs. It is obviously hard to see the pass-through to economic activity of such a small cut.

In our view, Russia is the country better positioned to accommodate on both monetary and fiscal side. Over the past years, Moscow has been building up FX reserves to reduce vulnerability to oil prices and US sanctions and, at the same time, it managed to lower inflation which gives the central bank ample room to lower interest rates. Consumer inflation, which is the key indicator monitored by the authorities, is under control, at 3.8% at the end of October, which is slightly under the 4% target. On the top of that, the central bank has recently revised downward its inflation forecast for the end of 2019 and for 2020. The main interest rate currently stands at 6.5%, and more cuts are expected in coming months to cope with the global economic slowdown.

Looking ahead, we believe that CPI will move downward in China in coming months once the pork prices crisis will be done, which will help the PBoC to intervene to support the economy if needed. As we don’t forecast a jump in oil prices anytime soon and taking into account current deflationary forces in Asia, we consider that the average CPI in the BRICS + Indonesia is likely to remain close to current level. High inflation, for a major part of the worldwide population, is not an issue anymore. The real problem is linked to lowflation, partially explained by the negative consequences of trade war on the global supply chain. Unfortunately, monetary policy is usually not well-equipped to face this issue.