Inflation game

Central banks in Latin America struggle to control inflation, but what levers do they have left?

Inflation is a global cause for concern and Latin America is in a particularly precarious position given its long-standing economic instability. Central banks across the region are struggling to control inflation, despite continued rises in interest rates.

As of October 2021, the cost of living in Argentina had skyrocketed by 52.1% while it had also escalated in the region’s other large economies, including: Brazil, 11.1%; Mexico, 6.2%; Chile, 6%; Peru, 5.8% and Colombia 4.5%.

A former Minister of Economy of a South American country observed, “Inflation in Latin America will be a worrying scenario for the short and medium term. All countries in the region will end the year with high rates of inflation, but in some cases, such as Argentina, it will be at very dangerous levels. Even the largest economies, Brazil and Mexico, could have inflation about 10 per cent. The biggest problem with all of this is that it will delay the economic recovery. The monetary authorities are going to do what they can to contain inflation but these policies will slow down the reactivation, there isn’t much room for manoeuvre.”

“Inflation in Latin America will be a worrying scenario for the short and medium term […] there isn’t much room for manoeuvre.”

Former Minister of Economy, South American country.

The combination of supply chain disruptions and the increasing prices for basic products like food and energy is causing problems worldwide but the combined effect of currency devaluation across Latin America is causing some of the highest rates of inflation worldwide.

“The devaluation of the [Brazilian] Real is compounding other inflationary pressures,” explained a political economist in São Paulo, “and it casts doubt over a potential recovery and return to food price normality. The Central Bank has tried to raise interest rates but, still, in this pre-electoral atmosphere of constant instability, it is incredibly difficult to attract investors.”

“The devaluation of the [Brazilian] Real is compounding other inflationary pressures and it casts doubt over a potential recovery.”

Political economist, São Paulo

Despite some early year positive signs of currency stabilisation, all of Latin America’s major currencies have succumbed to depreciation, bringing local currencies in Peru, Mexico, Colombia, Chile, Brazil and Argentina to below pre-pandemic levels.

Argentina’s extreme situation has prompted the government to impose limits on the export of beef to try to bring down prices. The government has also frozen the price of some food and household products. Furthermore, the Argentinean executive is expected to implement a new anti-inflation plan in 2022 coordinating monetary, exchange and income policy measures.

A former economic consultant to the Ministry of Economy in Peru observed, “Peru, Colombia, Chile and Argentina will be suffering the most from the increase in prices because they have been hit very hard by the pandemic and the left-wing governments, excluding Chile, will find it hard to finance giveaways.”

Upcoming elections in Colombia and Brazil will further complicate the role of central banks as presidential candidates seek to satisfy the needs of the population through social spending.

If your 2022 is looking challenging, spare a thought for the central bankers across Latin America!

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