Washington DC, 19 November 2021 (TDI): IMF reports that inflammation has surged in the largest economies of Latin America. The central banks in Latin America have raised interest rates.
International Monetary Fund
The International Monetary Fund (IMF) is an international financial institution. It consists of 190 member states. Moreover, it works to foster global monetary cooperation to secure financial stability. It facilitates international trade along with the promotion of high employment and sustainable economic growth.
Regional Economic Outlook for Latin America
According to the Regional Economic Outlook report inflation is rising. During the first wave of pandemic average inflation in Brazil, Chile, Colombia, Mexico, and Peru was below the average of emerging market economies. In October, it is averaging 8 percent. In the case of Brazil, it even surpassed 10 percent.
The pandemic still casts a shadow on Latin America’s economic recovery. In the first quarter of 2021, the recovery was robust. However, it lost momentum in the second quarter. It is due to the emergence of Covid-19 cases. Real GDP is projected to grow by 6.3 percent in 2021. However, it followed a more moderate growth of 3 percent in 2022.
The core inflation has exceeded the pre-pandemic trend this year. It reached an average of 5.9 percent in October. The pandemic has affected commodity prices as well. Moreover, the rising shipping rates are also a cause of concern.
Facts about Inflation
There are rising food prices. In Latin America, food prices make up about a quarter of the average consumption basket. The reason is the Coronavirus crisis as well as the income inequality in Latin American households. This is because the highest to low-income households spend a larger share of their income on food.
“Emerging markets and low-income countries are more vulnerable to food price shocks”.
The food prices surged even before the pandemic. At the beginning of the pandemic, the lockdown measures contributed to the inflations. The supply chain’s disruption induced a spike in the consumer price of goods. This is because consumer food prices include the shipping costs along with the marketing, and packaging of food. Moreover, the soaring shipping and transport costs will eventually increase consumer food inflation.
Latin America is facing a long history of high and unstable inflation. It is a challenge for central banks that have established their credibility. There are indexation practices and contracts that align their terms automatically with inflations. Consequently, it accelerates consumer Price goods.
International Financial Conditions
The international financial conditions are also causing inflation. There are capital outflows. The financial conditions tighten rapidly and unexpectedly. This is to protect the advanced economies. It is in response to inflation development in advanced economies. This process destabilizes financial stability. Moreover, the potential shock depreciates currencies in Latin America, adding to inflationary pressures.
The rate hikes are also an integral factor in the inflation spiral. The central banks in Latin America are mobilizing rapidly in order to preserve their hard-won credibility in an uncertain environment. The countries in the Latin American region have already hiked policy rates.
The emerging economies face an additional risk factor due to the currency depreciation against the US dollar. It is possibly due to falling export and tourism revenues. Moreover, capital outflows also contribute to inflation. The food commodities are traded in US dollars. Countries that have weaker currencies result in increased food import bills.
Despite these circumstances, the countries continue to support the ongoing recovery. The Latin American region nevertheless faces difficult trade-offs. It needs to balance an uncertain inflation outlook with employment opportunities. However, there is still an uneven recovery in Latin America’s jobs market.