Domestic factors playing a larger role in inflation dynamics in Latin America

Headline inflation rates in the four main Latin American economies have behaved in a less correlated fashion over the past four years, relative to 2007-2010.

Headline inflation has been rising steadily in Brazil, Chile and Colombia over the last year, while falling in Mexico. Inflation is likely to remain high this year in Brazil due to adjustments to regulated prices, but to fall inside the target range by 2016. 

A significant growth slowdown in Colombia could also bring inflation back inside the target range. Headline inflation is already receding in Chile, although core measures remain stubbornly high. In Mexico, inflation will likely remain fairly close to target this year and rise modestly next year as the economy grows faster.

BofA Merrill Lynch recommends: Buy NTNB 2050 in Brazil. Buy Jun16 BONO/MUDI inflation breakevens in Mexico.