Alphacast Highlight - What's the inflation situation in the Americas?
Alphacast Highlight - What's the inflation situation in the Americas?
By Maia Mindel (mmindel@alphacast.io)
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Latin America responded uniformly to the inflation surge, with varying degrees of success: Each country's price level responded to internal dynamics, but they all shared a common denominator: large monetary and fiscal stimulus packages in 2020 and sometimes even 2021, combined with surging international food and energy prices as a result of the situation in Ukraine, and global supply-side bottlenecks and disruptions from the pandemic and various global developments. Interest rate hikes over the past year have had an impact on price growth, with some countries proving more successful than others; at the same time, global financial conditions have affected and continue to affect the nations of Latin America in a variety of ways.
Though prices already peaked in all countries, and February's figures seem to show inflation is on the way down in many, the degree to which efforts will not stall and the speed of the normalization of price growth will be crucial to determine whether Latin America can meet the challenges posed by the current, much more complex situation.
Argentina has the highest inflation rate in the region, recently surpassing the three digit mark (102% YoY in February 2023), which follows the country's decade-long track record of extremely elevated price growth due to uniquely irresponsible macroeconomic policy. On the other end of the spectrum, Chile and Colombia currently have the second highest inflation rates in the region, nearing 15% YoY, and both started hiking rates from near-zero levels in September 2021, but these two countries have had different monetary policy trajectories: Chile's policy rate has increased more rapidly but plateau'd in the middle of the pack (at around 11.25%), whilst the Central Bank of Colombia moved more slowly, resulting in a higher terminal rate of 12.75%.
Peru, Uruguay, and Mexico have endured smaller surges in their respective inflation rates, staying below 10% at their peak, but these have proven far more stubborn - none have seen significant declines so far. Uruguay is a unique case, since its inflation surge happened in 2020, and then price growth stagnated at levels close to those of the prior decade, yet still significantly above the Central Bank's upper bound in its target range, resulting in early rate hikes from 4.5% in July 2021 to the current 11.5%. Meanwhile, Peru has followed the region's general trends, with inflation starting to rise in April 2021; Peruvian authorities started raising rates in August 2021 (among the last ones in the region), but rates rose more slowly and tapered far earlier, with the country now having the lowest policy rate in the region, at 7.75%. Thirdly, Mexico stands out for its close ties to the US economy, resulting in the Bank of Mexico having to track the Federal Reserve's moves, on top of the country's inflation situation. The Banxico policy rate started rising from near-zero in June 2021 to 11% in the current year, and it is not clear whether this country will have to continue tightening policy to reduce a level of price growth that has not budged in several months.
Brazil is a unique case in terms of its success in containing price growth. Faced with a surging inflation rate, the BCdB started hiking earlier than all other Latin American central banks (in March of 2021) and has been the most aggressive, with rates reaching the region's highest levels at 13.75%. Consequently, inflation has drastically fallen, from a peak of 12.1% YoY in April of 2022 to below 6% just under a year later. Finally, Ecuador has had the lowest inflation rate in the region, yet it still far surpasses its previous values; the country has proven mostly immune to inflation due to its dollarized economy, which is now suffering the effects of the American overhang instead.
The Fed's inflation fighting strategy shows limits, doubts
The United States is currently dealing with its highest inflation rate since the Volcker Shock era, largely due to having implemented the world's largest stimulus package in both 2020 and 2021, which ran into severe constraints from international suppliers and the COVID recovery, as well as a higher impact from international commodity disruptions than other regions. Nevertheless, the Federal Reserve was unusually cautious at springing into action, waiting nearly six months before considering rate hikes, and then waiting another four to step into action.
Inflation in the US has had, largely, three dimensions: excess demand resulting from changes in the composition of consumer spending, internationally traded commodities stemming from the War in Ukraine, and supply-constrained sectors within the US economy. In the first group, the build-up of savings throughout the pandemic, and the strongest labor market in decades, have bucked normal trends by shifting consumption from services to goods - especially durables, which have been affected by international factors, such as a microship shortage and limited capacity at US ports. The degree to which spending on durables will return to trend is not especially clear, but core goods inflation should continue slowing soon. Secondly, it seems that the nondurable (food and energy) price surge has come to a close, with international markets having mostly normalized outside of Europe, and suppliers have shifted within international supply chains. The last aspect is largely confined to housing (which makes up a third of the CPI basket and a majority of the services basket), with an explosion of prices and rents due to relocations related to work-from-home, as well as higher incomes and savings allowing homebuyers to make down payments. This sector is especially interest rate sensitive, as has been shown in crasing housing prices, slowing rents, and higher mortgage rates; however, official inflation data lags around a year behind private market measurements, meaning shelter won't peak until halfway through the year - and meaning that the full effect of interest rate hikes has not been observed yet.
The Fed's actions have had some success, reducing inflation over the past few months, but it's evident some limitations will be reached: food prices have behaved erratically due to domestic factors (shortages and the bird flu), whilst the housing sector has a large degree of inertia which is pushing printings to higher levels. The labor market and output have remained strong, but recent financial turmoil and bad prospects may change this. The recent bank failures and subsequent bailouts will be the first test of the Fed's resolve, and might mean a slowdown or pause in rate hikes.
