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Chart of the WeekLatin America’s Inflation Difficulty


Chart of the WeekLatin America’s Inflation Challenge

by Maximiliano Appendino


Inflation has actually risen in the biggest economies of Latin America, prompting big central banks in the region to raise interest rates before economic activity has actually totally recovered.

Our most current Regional Economic Outlook shows how rapidly inflation is increasing. In the very first year of the pandemic, typical inflation in Brazil, Chile, Colombia, Mexico, and Peru– the LA5– was below the average for other emerging market economies. It’s now higher, balancing 8 percent year-on-year in October and when it comes to Brazil, exceeding 10.5 percent.

Skyrocketing food prices are partially driving the rise. They began increasing even before the pandemic and have increased more than 18 percent on average in LA5 nations given that January 2020.

In Latin America, food prices make up about a quarter of the average consumption basket. For families still reeling from the coronavirus crisis, higher food expenses leave less to invest in other items. In an area with the highest levels of earnings inequality, the problem is highest for low-income homes who spend a larger share of their earnings on food.

Even core inflation, which leaves out food and energy rates, has gone beyond the pre-pandemic pattern this year, reaching approximately 5.9 percent year-on-year in October.

Inflationary pressures need to be short-term and medium-term inflation will likely go back to reserve bank targets. However there is a great deal of unpredictability. The shock from the pandemic is unique and its effect on commodity rates, supply traffic jams, and increasing shipping costs is difficult to determine.

The area is also battling a long history of high and unstable inflation– a challenge for reserve banks that have just recently established their credibility. This history may have resulted in indexation practices (agreements that adjust their terms automatically with inflation) that might accelerate costs even more.

There is also the threat that international monetary conditions tighten up quickly and all of a sudden in reaction to inflation developments in innovative economies, leading to capital outflows. This possible shock could jeopardize monetary stability and diminish currencies in Latin America, contributing to inflationary pressures.

Managing expectations, through declarations or rate walkings, is a key consider heading off an inflationary spiral, which is why central banks in the region are moving quick to protect their hard-won reliability in an unpredictable environment. All LA5 nations have currently hiked policy rates and their financial authorities have actually moved up forward assistance.

Regardless of the recent rate hikes, monetary policy stances usually remain accommodative and continue to support the ongoing healing. The area however faces hard compromises and needs to stabilize an unpredictable inflation outlook with employment still considerably listed below pre-pandemic levels and an irregular recovery in Latin America’s tasks market.

Related links:
Surging Energy Costs May Not Ease Until Next Year
Inflation Frightens in an Uncharted Healing
Four Realities about Soaring Consumer Food Rates

Released at Tue, 16 Nov 2021 15:00:08 +0000

Latin America’s Inflation Challenge

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