Alphacast Highlight - Inflation accelerated in 2022, following commodity price surge
By Maia Mindel (mmindel@alphacast.io)
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Following global trends, inflation rapidly accelerated in 2022 in Latin America, as a result of expansionary fiscal and monetary policies to counteract the 2020 recession brought on by the COVID pandemic, disruptions to international supply chains, and recent geopolitical tensions, as well as political uncertainty in a large swathe of the region.
Broadly, patterns in all countries are similar: after a depressed inflation rate during 2020, as a result of lower spending during the worst months of the pandemic, inflation began accelerating in the second half of 2021 and reached the highest levels in decades. This follows global trends, with price spillovers between countries being a possibility, as well as the effects of supply-side constraints last year, and of the War in Ukraine during the past seven months. Largely, inflation rates reflect a broad acceleration of the rate of price growth, rather than an increase in specific items (particularly food and energy), although it is clear that food inflation and global energy prices have contributed to the recent increases in cost of living. The combination of broad-based price increases with specific commodity market disruptions poses a significant challenge to policymakers.
Argentina has the highest inflation rate in the region, with prices having grown 77.1% in the last month available (August). Despite showing a similar trend to its neighbors, Argentina's inflation rate is by far the largest, and it is currently enduring its highest levels of price growth in nearly 30 years. Inflation in the country has followed an extraordinary expansion of the supply of money, to a large extent to fund the fiscal deficit. Disruptions in the currency market have also contributed to price growth, as have regulated price increases. Expectations for where inflation will stop are unclear, and there has been no significant changes in policies as of late.
The inflation rate in Chile is the second highest in the region, following one of the largest stimulus packages in the continent to ameliorate the economic impacts of the pandemic. The panorama is similar in most of the region, where large increases to government spending throughout 2020 are still having their effects on consumption and incomes - and therefore on the general price level. Politics has also played a role in the direction of the Chilean economy, with high uncertainty over the country's new constitution and a highly polarizing election.
Brazil, meanwhile, is experiencing a deceleration of price growth, following a much sharper increase during 2021 and early 2022 - in large part due to an earlier spike in food and beverages prices. Much like other countries in the region, supply and demand factors contributed to higher prices in Latin America's largest economy - however, headline inflation has fallen while core inflation remains elevated. This is due to both food and beverages prices showing little acceleration from last year, and to a recent decrease to the price of fuel owing to cuts in federal taxes. The political scenario in Brazil is tumultuous and uncertain, with outcomes after the election being less predictable than the winner itself.
Moreover, Colombia is also suffering from an elevated inflation rate, given the government's expansionary policies and similar pressures from the supply side; however, the election of a new government has also resulted in high uncertainty over each country's future monetary and fiscal policies - including concerns that the path to disinflation might be impeded. Other countries such as Mexico, Peru, and Paraguay have endured high inflation rates as well, as a result of accelerated commodity prices, the post-pandemic recovery, and political issues pertaining to each individually. In all cases, inflation has been broad-based for most of 2022, with supply side constraints making the issues worse.
Only three countries, Uruguay, Ecuador, and Bolivia have seen their inflation rates remain steady. In the case of Uruguay, inflation has not accelerated significantly in 2022, although it has returned to the levels prior to the pandemic, which were significantly above the central bank's target of 3% - with food and beverage prices spiking earlier than in the rest of the region, and then settling down.
Looking forward, the monetary environment remains volatile and interest rates around the world are hiking, which would affect global economies and interact with each nation's own monetary policy decisions. Latin American central bankers have largely heeded caution, and acted decisively by tightening the stance of policy significantly. Whether or not inflation is reduced in the region will come down to whether they can succeed and how global commodity markets develop, as well as how seamlessly major economies can disinflate.
