Inflation in America, another victim of the pandemic in 2021

In their efforts to face the second year of the pandemic, the largest economies in Latin America closed 2021 with a higher than expected price increase due to climatic, political and social factors and problems related to international trade.

The Economic Commission for Latin America and the Caribbean (ECLAC), a UN body based in Santiago de Chile, reported a general inflation of 7.2% for the region in 2021, not counting countries with chronic inflation, such as Argentina, Haiti , Suriname and Venezuela.

In its report “Preliminary Balance of the Economies of Latin America and the Caribbean”, it estimated that the economy of Latin America, the region most affected by the pandemic, grew 6.2% in 2021 and that 2022 will be marked by asymmetries between countries and a slowdown fueled by uncertainty.

“The pandemic has inflicted lasting damage on the growth of the economies in much of the region, which is aggravated by the structural problems that our region has had since before the crisis, these problems of low investment, low productivity and informality. ”, affirmed Alicia Bárcena, executive secretary of ECLAC, when presenting the report.

According to the World Health Organization (WHO), the pandemic leaves 326.2 million infections and 5.5 million deaths on the planet to date, with America being the region with the highest number of deaths, with 2.4 million.

The largest economies in Latin America, Brazil, Mexico, Chile and Colombia, performed above the ceiling of the central banks’ target range, while in Argentina and Venezuela the structural factors they had since before the health crisis continue to be seen.

The behavior of the other countries in the region was similar to the rise, with Uruguay (7.96%) and Guatemala (3.07%) the only ones that fell compared to what happened in 2020.

unfulfilled goals

The Colombian Daniel Velandia, chief economist of the financial holding company Credicorp Capital, explained that “over the past year there were a series of factors that ended up putting pressure, such as the breakdown of supply chains in logistics due to the shortage of supplies and transportation. maritime, the world container crisis added to the measures of the Governments (2020) since each country in the region faced climatic and political factors that led to a depreciation of the exchange rate, strikes and social protests”.

Thus, the Consumer Price Index (CPI) of 10.06% in 2021 in Brazil was above the Central Bank’s goal of 3.75% and exceeded that of the previous year (4.52%). In the largest economy in the region, there was the strongest drought in 100 years, which increased the price of fuel (49.02%) and electricity (21.21%), but also suffered from the crisis of the COVID-19.

In an attempt to control the sharp increase in prices in recent months, the Central Bank has been raising basic interest rates, which closed 2021 at 9.25% per year, its highest level since 2017 (10.25%), after seven consecutive hikes.

Mexico followed in its footsteps, with 7.36%, after a significant rise in the cost of food and energy. A figure that has not been seen since December 2000, 21 years ago, and that is worrying because there are 55.7 million Mexicans living in poverty, 43.9% of the population, according to the National Council for the Evaluation of Social Development Policy (Coneval ).

Not since 2007 has Chile finished a year with 7.20% inflation. This time, due to the provision of financial aid and early withdrawals of 10% of pension funds, measures that the Government applied to counteract the coronavirus crisis.

The central bank of the South American country increased interest rates by 350 basis points since July last year to combat rising inflation, leaving the reference rate at 4%, the highest level since 2014.

Meanwhile, the CPI in Colombia closed at 5.62%, marked by the rise in food prices, being 4.01 percentage points higher than the variation of 1.61% in 2020. These indices were related to difficulties in importing supplies farmers due to the global container crisis and the demonstrations that shook the country in the middle of the year against the government’s economic and social policy.

“Increased demand coupled with supply chain disruptions and rising international energy and food prices have exacerbated the impact on prices,” said Eric Parrado, chief economist at the Inter-American Development Bank. (IDB).

However, he added, these “trends should be temporary if the central banks act to slow down the increase in inflation expectations and if the vaccination process continues so that Latin America and the Caribbean becomes a regional leader that helps to unlock supply chains and attract investment”.

Argentina and Venezuela need independence

On the other shore, Argentina and Venezuela, which share a tradition of high indices, moved away a bit.

The Central Bank of Venezuela (BCV) reported that inflation in the country was 686.4% in 2021, and thus left the hyperinflationary cycle after four years, although it maintains it as the nation with the highest figure in the world.

In the opinion of Hernando Zuleta, a professor at the Faculty of Economics at the Universidad de Los Andes, in Bogotá, “the question for Venezuela is whether they are going to return to reasonable monetary policy management.” “I am referring to not financing public spending with issuance hand over fist. I would expect inflation to continue to decline and stabilize below 10%,” he added.

On the other hand, in Argentina, where inflation is a historical problem and although it improved a little compared to what happened in 2019 (53.8%), the IPC jumped 14.80 points to 50.90%, compared to 36.10 % of the previous year. The main increase in prices occurred last December, in the restaurant and hotel sectors (5.9%).

Several state subsidy programs emerged in 2021, which, together with the restrictions to buy dollars and the freezing of basic service bills, sought to delay the increase in inflation.

“The costs that Venezuela and Argentina are associated with the loss of independence identity, the Executive ends up deciding how monetary policy is carried out. The challenge for the future for these two countries is a little more independence”, added Zuleta.

In the conclusion of Juan Carlos Martínez Lázaro, professor of Economics at the IE Bussines School, in Spain, inflation was the “economically unwelcome guest in 2021″, and therefore, a “complicated” moment was entered in Latin America.

“Interest rates that are high are going to have to continue to rise, surely, as the Fed (Federal Reserve) tighten its monetary policy, and that will end up having an effect on growth that will surely be less than initially expected, “he added.

And for this 2022, Martínez considers that inflation will moderate: “We will tend towards levels that will be at the end of the year at 5.5% in Brazil, 4.5% in Chile, and in other countries of the region around 4% and 5%. They are high levels but lower than what we have had in 2021.”

The following is the comparison of inflation in Latin America:

Country 2020 2021

Argentina 36.10% 50.90%

Bolivia 0.67% 0.90%

Brazil 4.52% 10.06%

Colombia 1.61% 5.62%

Costa Rica 0.89% 3.30%

*Cuba Not available 70.00%

Chile 3.00% 7.20%

Ecuador -0.90% 1.94%

El Salvador Not available Not available

Guatemala 4.82% 3.07%

Honduras 4.01% 5.32%

Mexico 3.15% 7.36%

Nicaragua Not available Not available

Panama -0.80% 2.60%

Paraguay 2.20% 6.80%

Peru 1.97% 6.43%

Dominican R. 4.63% 8.50%

Uruguay 9.41% 7.96%

Venezuela 844.10% 686.40%

*Projection of the Cuban Government, although experts speak of more than 500%.