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In an earlier post, we explored the lagged correlations between Brent crude oil price changes and CPI  (Figure 1). Here, we see that for many LATAM countries pass-through is weaker and relatively slower than countries like the U.S. and South Korea.

Figure 1

The inflation impact of an oil shock in Latin America can be understood by considering three layers of transmission:

1. Exposure – whether a country is a net importer and how heavily fuel weighs in the CPI basket
2. Extent of intervention – whether a country decides to leverage subsidies or administrative price controls or whether they already have automatic stabilizers
3. Cross-elasticities – second-round responses to food, transport, FX, and domestic supply disruptions

Most governments in the region are actively smoothing pass-through, so the immediate inflation effect is being shaped more by administrative choices than by the external shock itself. But that insulation is uneven. At one end, Mexico and Brazil remain relatively buffered. At the other, Peru is absorbing a largely unfiltered shock. In between, Colombia is actively offsetting global price pressure, Chile faces a policy-driven regime shift risk, and Argentina is allowing pass-through, but gradually. In the following sections, we go into cross-country pass-through in greater detail.

Mexico — Most Insulated

Mexico remains the most insulated economy in the region. President Sheinbaum has capped retail gasoline prices at MXN 24/litre, while the IEPS excise tax continues to operate as an automatic stabiliser, compressing as international prices rise. Together, these mechanisms sharply reduce the transmission of Brent into consumer fuel prices.

The constraint is fiscal. The longer oil prices stay elevated, the more IEPS revenue is sacrificed, raising the eventual probability of adjustment.

Brazil — Contained, but with a Diesel Tail Risk

Brazil has also contained near-term pass-through. Petrobras has signaled that it will not fully transmit the shock to domestic prices, and the government is moving to eliminate the PIS/Cofins levy on diesel imports. On the gasoline side, the increase in the ethanol blend to 30% provides an additional cushion.

The main vulnerability is diesel. Brazil still imports roughly a quarter of its diesel needs, leaving part of the economy exposed to higher global prices. At the same time, rising fertiliser costs, particularly urea, create a secondary channel into food inflation if the shock persists.

Colombia — Offsetting the Shock

To read the rest, visit our latest Substack post, here.