Buzz Update Latin America was hit one by one by the inflation shock TOU

Buzz Update Latin America was hit one by one by the inflation shock

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Latin America was hit one by one by the inflation shock

Sao Paulo market in Brazil. Locals are feeling the pinch with rising prices. (Photo: iStock / Fernando Podolski)

Latin America was hit one by one by the inflation shock

By Maximiliano Appendino, Ilan Goldfajn and Samuel Pienknagura
Western Hemisphere Division

            <p class="date">April 15, 2022</p>

After years of fluctuations around targets, inflation in Latin America’s largest economies has hit a 15 – year high, hitting two major shocks: the pandemic impact and the Russo-Ukraine war.

Like other emerging markets and developed economies, inflation is set to accelerate in 2021 in Brazil, Chile, Colombia, Mexico and Peru-the LA5. The rise in inflation was initially due to rising food and fuel prices but widened to reflect monetary policy inertia. And wage index methods (contracts that automatically adjust their terms with inflation), as well as strong recovery in demand, initially for goods but also for services.

The War in Ukraine Another inflation shock for the region. Our forecasts suggest that a 10 per cent rise in global oil prices will lead to a 0.2 percentage point rise in inflation in LA5, while a 10 per cent rise in global food prices will lead to a 0.9 percentage point rise in inflation. The combination of both oil and food prices will push shock inflation by 10 percentage points to 1.1 percentage points.

Inflationary pressures exacerbated by the war are likely to continue due to the existing indexation and forecasts that the labor market will tighten in some countries.

Inflation in Latin America

In addition to the macroeconomic impact, current high inflation is in recession, with low-income households suffering the most from rising cost-of-living costs. In an area with historically high levels of inequality, real income cuts due to rising prices of food and energy will only contribute to the economic pressures faced by vulnerable families in the region. And as we have shown in our October 2021 Outlook, low-income families are already increasingly affected by the economic consequences of the epidemic.
Rising food and energy prices

Inflation drivers

Global factors, especially commodities and import prices, are the key drivers of inflation in 2021. Our analysis suggests that these will play a bigger role in this region than developed economies.

Domestic factors also contributed. Although they are often country-specific, they have little to do with the pandemic common to countries in the region. As in some advanced economies such as the United States, in LA5 they appear to be related to the recovery in private consumption in 2021.

Economic stimulus and other support measures have boosted demand for goods in most LA5 countries in the early months of the pandemic and major commodity inflation. With rising demand for services and support for the lifting of mobility constraints, inflation has widened based on the recent rise in major services inflation. For example, private demand for goods in Chile rose rapidly and strongly in the wake of financial support and pension withdrawals, and steady but slight recovery in private demand for services contributed to a 6.6 percent year-on-year rise in headline inflation. – In the year February 2022.

Inflation in Latin America

The long-term expectations are good

With the easing of unprecedented monetary policy to support the economy in the early months of the epidemic, central banks in the LA5 quickly reversed their stance when inflation began to rise, often tightening rates higher than market participants had anticipated.

March 2021 was the first to change the course of the Central Bank of Brazil, and others followed suit, leading to cumulative rate hikes from their end-2020 levels to 1.75 to 9.75 percentage points.

These measures, along with the hard-gen credibility of LA5 central banks in combating inflation, have kept long-term inflation expectations stable despite rising inflation. As shown in the October 2021 Outlook, LA5 Central Banks appear to have gained more credibility than the average emerging market central bank.

Central banks should be vigilant and take decisive action if necessary.

Inflation in Latin America Chart 4

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Ilan Goldfazn Director of the Western Hemisphere Division of the IMF.

Maximiliano Appendino And Samuel Pienknagura Economists in the Western Hemisphere Division of the IMF.

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