Inflation is raging everywhere, but it is the worst in Latin America – News Couple
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Inflation is raging everywhere, but it is the worst in Latin America


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Inflation shocks spread the pain around the world, but nowhere is this as bad as Latin America.

Price hikes are breaching policymakers’ targets in all major economies in the region, with annual inflation this month at 6% in Chile, 6.2% in Mexico, 10.7% in Brazil and 52% in Argentina. Major Wall Street banks expect average cost-of-living increases across Latin America to end the year above 10%, the highest globally, and expect the pressure on consumer prices to extend well into 2022.

The world’s worst inflation is adding to the pain in Latin America as one of the regions hardest hit during the pandemic. While the financial support was unprecedented in many of its countries, in most places it was a fraction of the giveaway seen in the United States, Germany or Japan.

Now, as the region emerges from its worst economic crisis in two centuries, Latin Americans are staring at the prospects of low growth and rapid inflation. The economic disaster has already been a setback for poverty reduction efforts and could also fuel immigration and brain drain — workers affected by the loss of purchasing power may be more likely to head to the United States in search of better prospects.

Central banks across Latin America are embarking on some of the most risky price increases in the world in response, but so far they have done little to quell expectations of ever-rising prices. One problem is that the drivers of inflation – things like global shipping bottlenecks and rising commodity costs – are unlikely to be defeated as interest rates rise. But another region-specific issue is the self-fulfilling prophecy about expectations that things will get worse, a mindset fueled by years of rapid price increases in the past decades.

“Supply shocks are not really something you can fight with monetary policy,” said Andre Luz, chief Latin American economist at Morgan Stanley in Sao Paulo. “Latin America has a longer history than most with regard to inflation and it has a very relevant impact on expectations. People have a memory of those years.”

Why inflation is scaring Latin America if not the Fed: QuickTake

Latin America’s annual inflation rate will reach 10.6% this year, according to forecasts by Citigroup Inc. , while Morgan Stanley’s estimates of the six largest growth-weighted economies also put price gains above 10%. The median forecast of economists polled by Bloomberg sees Latin America’s inflation rate at 11.9% and 10.4% this year and next, the world’s fastest price squeeze by a long time lag.

Monuments can be seen everywhere in the area. In Brazil, chicken and egg prices rose about 29% in October compared to the previous year. In Mexico, the price of cooking gas is 8.2% higher than the previous month.

Adriana Cardoso Oliveira, a 53-year-old self-employed baker from Estancia, in northeastern Brazil, says the high costs of ingredients have slashed the profits of the cakes and pastries she sells online. They are reluctant to raise the prices they charge once their costs rise, for fear of losing customers. Instead, it reduces its own spending.

“I used to buy two kilograms of meat a month, and now I buy only one,” she said in an interview. “My budget changed quickly.”

Markets reflect pessimism as well. Swaps are up in Brazil, with traders now pricing in interest rates as high as 12% in 2023, which will be the steepest since 2017. Mexico’s two-year inflation rate (expecting a rate increase derived from bond yields) was 5.08% in early October The second (November), well above the central bank’s 3% target, although it has since pulled back from highs. According to the Bloomberg Index, debt denominated in local currencies from the six largest economies in Latin America has lost 15% this year.

One of the most troubling parts of the situation is that the increase in interest rates and the rise in commodity export prices have not supported the local currencies, which would add anti-inflation power by lowering the cost of imports. Instead, the currencies of Chile, Colombia and Argentina have fallen by at least 10% this year, while the Mexican peso and the Brazilian real have also fallen to lower notches.

“Higher commodity prices have meant stronger currencies for Latin America, but that connection appears to be breaking with the pandemic,” said Ernesto Rivella, chief Latin American economist at Citigroup. “It wasn’t the usual temporary shock we’re used to.”

Rising inflation has increased pressure on Latin American governments to deal with spending and cut budget deficits, just as it is pushing restive populations across the region for more support.

Consumer prices in Chile jumped to their highest level in 12 years due in part to early pension withdrawals that fueled consumption and increased demand for new electronics and cars. In Colombia, the government proposed a tax reform that led to a sharp backlash that prompted the Minister of Finance to resign. Brazil is discussing changes to its spending cap to make room for new cash transfers.

With presidential elections looming in Brazil and Colombia next year, Rivella said it wouldn’t surprise him to see governments choosing innovative ways to control the impact of price gains on their voters. Brazil, for example, is debating gasoline subsidies.

Read more: Interest rates are not the only weapon in the fight against global inflation

Regardless of the financial outlook, it is unlikely that any of the major economies in Latin America will reach their inflation target this year. Brazil and Mexico, the two largest economies, are likely to end 2021 with inflation double their targets.

“Central bankers are trying to avoid investors believing that this will be a supply shock that will lead to permanent inflation,” said Mario Castro, interest rate analyst at Bank Bilbao Vizcaya Argentaria SA. “And they clench their toes and they don’t have to hike very hard in the back of this.”

Brazil has raised its borrowing costs 5.75 percentage points since March for the largest interest rate increase in the world. Chile only started tightening in July but has now raised interest rates by 225 basis points. Colombia added 75 basis points to its benchmark, and Mexico added 100 basis points.

Read more: Inflation in Mexico will end the year at its highest level in two decades, according to the survey

The Latin American inflation crisis is just another factor that will affect growth and poverty reduction for years to come, according to economists at Goldman Sachs Group Inc. Led by Alberto Ramos.

As the social outlook deteriorates after the pandemic, they wrote recently, “old enemies, low growth, and high inflation are re-emerging.”

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