Inflation in Latin America continues to soar even as the central bank steps up to raise interest rates
After raising interest rates seven times in eleven months, Brazil is now facing the worst economic scenario: stagflation.
The inflation rates of Brazil and Mexico, the two largest Latin American economies, have continued to rise despite repeated interest rate hikes by their respective central banks. In Brazil, interest rates have risen faster this year than any other major economy, but it has little noticeable impact on consumer price inflation or producer prices.
On Wednesday (December 8th), the Central Bank of Brazil raised the Selic interest rate by 150 basis points to 9.25%. This is the second rate hike of 150 basis points since October and the seventh consecutive rate hike in 2021. Since March, borrowing costs in Brazil have soared by 725 basis points, the largest increase among major economies.But consumer price inflation and Producer prices continue to riseThe central bank has promised that the tightening cycle will not end until inflation expectations rise to the central bank’s target (3.75%).
“It is appropriate to clearly advance the monetary tightening process into restricted areas,” the central bank wrote In the statement attached to its decision. “The committee will stick to its strategy until the deflationary process and expectations around its goals are consolidated.”
Brazil is now facing the most terrifying economic scenario: stagflation. A mixed term of “stagnation” and “inflation”, stagflation refers to the situation where prices will not stop rising in the case of economic downturn and shrinking. As shown in the chart below (provided by Trading Economics) since December 2020, inflation has been on an upward trajectory. In October, the inflation rate reached a nearly six-year high of 10.67%, almost three times the central bank’s target.
The economy is also in recession, shrinking by 0.4% in the second quarter of 2021 and 0.1% in the third quarter.
Despite the slowdown in economic activity, the central bank still slammed on the brakes of monetary policy in an attempt to curb inflation. But it may also make it more difficult for debt-laden companies and consumers to repay their debts, thereby squeezing more vitality from the economy. As prices and borrowing costs rise at the same time, the harm to consumers and businesses is greater than before. The National Business Federation’s household consumption willingness index fell in November because higher inflation and interest rates suppressed household spending. Brazil report Report:
The survey results confirmed a survey conducted by the consumer protection service agency Procon, which emphasized that 70% of consumers in Sao Paulo claimed to have lost their income during the pandemic. More than 90% of people said that necessities such as food, electricity and fuel have taken up a large part of their family budget.
The interest rate hike seems to have a muted effect on inflation in Brazil under any circumstances. Given that today’s inflationary pressures are caused by countless factors, many of which are global in nature and therefore beyond the control of the Central Bank of Brazil, this should not be surprising. They include extreme weather events, such as the once-in-a-century drought that Brazil suffered this summer (the winter in Brazil), which not only boosted food prices, but also energy prices, because Brazil is dependent on about two-thirds of its time. Hydropower. The electricity it consumes. Given the highly interconnected global economy, extreme weather events in other parts of the world may eventually lead to price increases in Brazil.
Another key factor driving price increases is the global supply chain crisis, and there are few signs that it will ease soon. Monetary stimulus plans in more advanced economies may also exacerbate global price increases, although the specific magnitude cannot be determined.This may be the confluence of these two factors-as the money supply surges, the global supply of many important products is drastically restricted (despite the current trend Seems to be slowing down)-This is indeed harmful.
The situation in Mexico is better than that in Brazil. The economy is still growing, although not enough to make up for the 8.5% contraction last year. According to estimates by the Bank of Mexico, the annual economic growth is expected to reach about 6.5% by the end of this year.
But just like in Brazil, inflation is raging. The country’s consumer price index soared from 6.24% in October to 7.37% at the end of November.As transaction economics notes, This is the highest increase in CPI since January 2001 due to the cost of food and non-alcoholic beverages (10.8% vs. 8.4% in October), transportation (9.5% vs. 7.3%), furniture and home maintenance (7%) Surge vs 6.2%) and restaurants and hotels (7.1% vs 6.7%).
The price of staple food has risen the most. By 2021, the price of green tomatoes has soared by 148%; fresh peppers, 137%; avocados, 46%; onions, 45%; tomatoes, 36%; and tortillas, 16%.As nation ReportFor young Mexican adults of Gen Z, the soaring prices are a thought-provoking experience—the so-called centennial generation, born between 1996 and 2012—have never witnessed such a dramatic increase in inflation.
For most of the older generation, rising prices undoubtedly evoke painful memories of the sharp depreciation in the 1980s and 1990s, which triggered brutal inflation. In the lost decade of the 1980s, the inflation rate reached an alarming peak of 179% in February 1988. A few years later, with the raging tequila crisis, it once again briefly soared above 50%. In both crises, people with dollar accounts did a good job, while most middle- and lower-level people could only stand by and watch their savings and purchasing power collapse.
But it’s not just consumers who feel the pain of inflation; so do many businesses, especially small businesses. Today, many of these companies are still struggling to recover from the economic impact of the blockade last year. Now, according to data from the National Alliance of Small Businesses (ANPEC), six out of ten small businesses in Mexico have seen a decline in sales in recent months due to rising inflation. “If inflation continues to rise, more people will be in trouble,” Say Cuauhtémoc Rivera, Chairman of ANPEC.
As i am in mine Previous Regarding inflation in Latin America (released on October 5), prices along the Andes are also rising rapidly. This trend has sharply intensified in the past two months.
Chile’s inflation rate has been rising since February this year, reaching 6.7% in November, the highest level since 2008. In the same month, Peru’s CPI was 5.7%, while Colombia’s CPI reached a four-year high of 5.26%. Uruguay’s consumer price inflation rate rose to 8%, while in Argentina on the other side of the Plata River, the official inflation rate was once again firmly above 50%.
The speed at which this trend occurs may be the most worrying. In the first year of the pandemic, Brazil, Mexico, Chile, Peru, and Colombia, the five largest and most financially integrated Latin American countries-the so-called “LA5”-had lower inflation rates than emerging market economies The average level.Now it is higher, as shown in the picture below International Monetary Fund blog post.
As shown in the figure, one of the main forces driving the surge in inflation is the soaring food prices, which has hit the poorest people particularly hard. As the IMF blog points out, food prices “started to rise even before the pandemic. Since January 2020, food prices in LA5 countries have risen by more than 18% on average:
In Latin America, food prices account for about a quarter of the average consumer basket. For families still affected by the coronavirus crisis, higher food costs will reduce spending on other commodities. In areas with the highest income inequality, low-income families have the heaviest burden, and their income from food accounts for a larger proportion.
Even core inflation, which does not include food and energy prices, exceeded the pre-pandemic trend this year, reaching an average year-on-year increase of 5.9% in October.
As Latin America’s central banks try to curb inflationary pressures by raising interest rates, they are likely to plunge the economy into a stagflation spiral, as has already happened in Brazil. One of the reasons for the central bank to do this is to protect the national currency from the impact of the strengthening of the U.S. dollar. They know that if the financial conditions of the United States and other advanced economies suddenly tighten, because the Fed and other major central banks start to raise interest rates to curb inflation (which is not impossible), this may trigger a substantial asset sell-off, the closure of the domestic economy and capital outflows. . This is the number of financial crises that have already begun in Latin America.