Surge In EM Inflation Unlikely To Last

• Inflation has picked up markedly in recent months, both in emerging markets (EMs) and developed markets (DMs). The simple average of inflation among 22 of the world’s largest EMs rose from 3.8% y-o-y at the start of 2021 to 5.9% in May. However, it is believed that the rise will be temporary. 
• Accelerating inflation has already prompted interest rate hikes in Brazil, Russia, Mexico and elsewhere. It is expected that policymakers in EMs, including South Africa, Egypt and Colombia, will follow their lead by hiking their key rates before the end of 2021. 
• Even so, the risk of an economically disruptive acceleration in EM-wide inflation is low. For one, recent inflation prints may mark a sharp increase from the abnormally slow inflation of the past year, but they are not particularly elevated by recent standards and even these figures are currently being flattered by the base effects caused by lockdowns in 2020. 
• In addition to fading base effects, there are two key reasons why it is forecast that current period of comparatively elevated inflation will soon fade in most economies. Firstly, temporary factors that are disrupting supply chains will probably be resolved over the coming months; and secondly, the agency believes that commodity prices have peaked and will now ease in late 2021 and into 2022.

(Source: Fitch Solutions)