The U. S. Federal Reserve, like many other central banks, sees inflation from the reopening of economies disrupted by the pandemic to be “transitory,” and it’s not expected to raise interest rates until at least next year. Latin America’s policy makers, by contrast, are rushing to reverse ultra-low borrowing costs. In the last five weeks, central banks in Brazil, Mexico, Peru, Chile and even Uruguay have increased rates, while many expect Colombia to follow soon. Latin America was perhaps hit harder than any other region by Covid-19 and is experiencing a quick economic rebound that puts pressure on prices. Other reasons for the difference, though, may have to do with the continent’s high levels of inequality, informality and political instability — together with a history of inflationary bouts deeply etched into the collective economic memory. Around the world, prices have been rising faster than usual as the end of many pandemic-related restrictions released pent-up consumer demand that disrupted supply chains have struggled to meet. Some factors have affected Latin America in particular. For instance, the global rally of food and energy prices has had a disproportionately large impact on the world’s most unequal region: food prices make up a greater share of inflation indexes in Latin America than in advanced economies like the U. S. That means that soaring food prices — beef is up 43% in Brazil — have played a larger role in overall inflation. Yes. Many countries in the region are also net energy importers, and have seen surging gas prices as rising demand has led to tighter global oil markets. Recent social unrest has triggered volatility in some currencies too. There’s a strong tie between prices and currencies in Latin America, and devaluations almost immediately show up in inflation. Meanwhile, governments face continued pressure to sustain increased social spending adopted to combat the jump in poverty caused by the pandemic. The prospect of larger deficits has both soured investors on the currency outlook and increased their inflation expectations, which often causes local businesses to raise prices more and workers to demand higher pay increases in the near-term to hedge against future inflation. All this comes on top of being a region with a history of high inflation: It averaged over 100% annually in the late 1980s and early ‘90s, according to the International Monetary Fund. Here’s how inflation is currently affecting monetary policy in Latin AmericaThey’re trying to head off the kind of deterioration in exchange rates that commonly occur in emerging economies when inflation expectations rise. Latin America is already home to four of the six worst performing currencies in emerging markets this year. They’re also reacting to a stronger-than-expected economic recovery — the region is set to grow this year at the fastest pace since 2009.
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