It is no secret that Latin American economies are currently experiencing a boom. Spearheaded by Brazil, Colombia, Peru and Uruguay are attracting an almost unprecedented interest from foreign investors in search of higher yields and ample liquidity. However, the headlines for Latin America may appear rosy, but a familiar cancer is again showing signs of being a detriment to economic expansion—inflation.
The international landscape has changed dramatically from the last financial crisis. The status quo would have been the United States and Western Europe would have been the main economic engines that would have pulled the international economy out of this ‘global recession’. Obviously, with Europe battling its sovereign debt issues with Greece, Ireland, Portugal and Spain, and the United States attempting to spend its way into a period of economic expansion coupled with high unemployment, other developing countries were surprisingly able to recover quicker and keep the global economy humming.
Latin America has benefited from this change of order, with its oil and commodities exports reaching unprecedented heights thanks to the insatiable demand from China, India, and Russia. It is estimated that Latin America as a whole grew at a rate of 5.6 percent in 2010, while according to The Economist Intelligence Unit, individually some countries exceeded the average: Argentina (8.3%), Peru (7.9%) and Brazil (7.7%). In simple terms, the huge demand for Latin America’s oil, minerals, and agricultural goods have undoubtedly increased the cost of its’ exports, generated more capital inflows, and strengthened its’ currencies. These factors are all elements of current inflation-creation in Latin America.
For instance, in Argentina, independent economists have stated that inflation rose up to 30 percent in 2010. Although, the Argentine government denies these figures (they say it is only 9-10 percent), the Argentine consumer is spending more on consumer goods such as cars, televisions and appliances because of fear that it might cost more in the near future. Brazil has officially announced that inflation has passed the central bank’s target of 4.5 percent. As a result, President Rousseff declared a spending cut plan, which could negatively affect Brazil’s GDP in 2011 by 1.5 to 2 percent.
Chile’s central bank is trying to tame inflation and currency appreciation before it evolves into something bigger. One of many measures by Chile’s central bank has been to continue to raise interest rates. Chile’s central bank president has stated that these are preventative actions in a climate of higher international food and energy prices. Peru and Colombia continue to purchase dollars in the exchange market, with the purpose of stabilizing their currency, with hopes that it might stall the momentum of inflation.
A snapshot of how inflation is making a mark can be seen through food prices. From September-November 2010, maize, palm oil, and soybean oil prices have increased 7 percent per month. In the same time period, sugar, gold, coffee, and copper have had price increases of roughly more than 5 percent per month. A simple interpretation can be made that these particular exports have been obviously booming, and since demand dictates price, and it appears the appetite for these commodities remains fierce, we can easily conclude a steady increase of prices is to be expected. Yet, on the other side of the coin, currencies have appreciated substantially, especially in Brazil, Peru, Chile, and Colombia, making it harder for exporters to compete in the international market.
The problem lies in what should be the next step for Latin American leaders. Historically, Latin America has been overlooked in the global financial community. Currently, there exists a peculiar wave of optimism, reinforced by the continued capital inflows and foreign investment. However, not all roads lead to Rome, and if the central bankers of Latin America do not take precautionary measures, it puts at risk their economies overheating, destabilizing their markets and having to combat real high inflation. This situation clearly highlights the paradox of rapid growth. For certain, you don’t want to scare away hot money, but at the same time you don’t want to replicate the boom periods of Spain and Ireland in the last decade, or Brazil in the early 1990s, where inflation reached a mark of 2,000 percent. The central bankers of Latin America appear to have a ‘good’ problem regarding their economies, but luckily they have recent history to remind them that rapid growth, such as what transpired in the U.S. and Japan, can evolve into a period or decade of economic pain.
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Is Inflation Making a Comeback in Latin America?
February 25, 2011
It is no secret that Latin American economies are currently experiencing a boom. Spearheaded by Brazil, Colombia, Peru and Uruguay are attracting an almost unprecedented interest from foreign investors in search of higher yields and ample liquidity. However, the headlines for Latin America may appear rosy, but a familiar cancer is again showing signs of being a detriment to economic expansion—inflation.
The international landscape has changed dramatically from the last financial crisis. The status quo would have been the United States and Western Europe would have been the main economic engines that would have pulled the international economy out of this ‘global recession’. Obviously, with Europe battling its sovereign debt issues with Greece, Ireland, Portugal and Spain, and the United States attempting to spend its way into a period of economic expansion coupled with high unemployment, other developing countries were surprisingly able to recover quicker and keep the global economy humming.
Latin America has benefited from this change of order, with its oil and commodities exports reaching unprecedented heights thanks to the insatiable demand from China, India, and Russia. It is estimated that Latin America as a whole grew at a rate of 5.6 percent in 2010, while according to The Economist Intelligence Unit, individually some countries exceeded the average: Argentina (8.3%), Peru (7.9%) and Brazil (7.7%). In simple terms, the huge demand for Latin America’s oil, minerals, and agricultural goods have undoubtedly increased the cost of its’ exports, generated more capital inflows, and strengthened its’ currencies. These factors are all elements of current inflation-creation in Latin America.
For instance, in Argentina, independent economists have stated that inflation rose up to 30 percent in 2010. Although, the Argentine government denies these figures (they say it is only 9-10 percent), the Argentine consumer is spending more on consumer goods such as cars, televisions and appliances because of fear that it might cost more in the near future. Brazil has officially announced that inflation has passed the central bank’s target of 4.5 percent. As a result, President Rousseff declared a spending cut plan, which could negatively affect Brazil’s GDP in 2011 by 1.5 to 2 percent.
Chile’s central bank is trying to tame inflation and currency appreciation before it evolves into something bigger. One of many measures by Chile’s central bank has been to continue to raise interest rates. Chile’s central bank president has stated that these are preventative actions in a climate of higher international food and energy prices. Peru and Colombia continue to purchase dollars in the exchange market, with the purpose of stabilizing their currency, with hopes that it might stall the momentum of inflation.
A snapshot of how inflation is making a mark can be seen through food prices. From September-November 2010, maize, palm oil, and soybean oil prices have increased 7 percent per month. In the same time period, sugar, gold, coffee, and copper have had price increases of roughly more than 5 percent per month. A simple interpretation can be made that these particular exports have been obviously booming, and since demand dictates price, and it appears the appetite for these commodities remains fierce, we can easily conclude a steady increase of prices is to be expected. Yet, on the other side of the coin, currencies have appreciated substantially, especially in Brazil, Peru, Chile, and Colombia, making it harder for exporters to compete in the international market.
The problem lies in what should be the next step for Latin American leaders. Historically, Latin America has been overlooked in the global financial community. Currently, there exists a peculiar wave of optimism, reinforced by the continued capital inflows and foreign investment. However, not all roads lead to Rome, and if the central bankers of Latin America do not take precautionary measures, it puts at risk their economies overheating, destabilizing their markets and having to combat real high inflation. This situation clearly highlights the paradox of rapid growth. For certain, you don’t want to scare away hot money, but at the same time you don’t want to replicate the boom periods of Spain and Ireland in the last decade, or Brazil in the early 1990s, where inflation reached a mark of 2,000 percent. The central bankers of Latin America appear to have a ‘good’ problem regarding their economies, but luckily they have recent history to remind them that rapid growth, such as what transpired in the U.S. and Japan, can evolve into a period or decade of economic pain.
