We think that the increased likelihood of the “El Niño” weather pattern poses a stagflationary risk for emerging markets because of its potentially large impact on food prices.
A key plank of our view on emerging markets (EM) is that steep declines in inflation, in part due to a reversal of food price pressures, would allow central banks to start cutting interest rates this year, brightening the outlook for economic growth in 2024.
Incoming data have so far suggested that this view is playing out. Inflation surprise indices have fallen as CPI rates have started to decline. A reversal of energy inflation has so far done the heavy lifting, but food inflation has now clearly begun to roll over, while core price pressures are also starting to fade. Against this backdrop, falling survey measures of inflation suggest that it won’t be long until an EM easing cycle gets underway.
Click here to read more...