The growth for Latin America is projected to slow down to 1.6% this year. The region saw some phenomenal statistics last year with growth touching a peak of 4 percent. More than growth, inflation is the main cause of worry for the governments in the region.
Latin America has a history of high inflation rates disrupting regimes. The region is mired in periods of socio-economic turmoil triggered by unchecked inflation.
Latin American governments in the post-pandemic phase have been more careful. The inflation peaked at 10% in mid-2022 and has now come down to 7% this March. The core inflation is still higher than is acceptable to the economic policy experts of the region. The current drop in the inflation rate was caused by a fall in the price of commodities. The cost of living continues to be high in most countries. However, employment is above pre-pandemic levels. This is a positive sign of recovery, much needed after the pandemic. The tight labor market has led to a wage increase which in turn spurred demand. Higher demand is one of the factors that is making inflation difficult to control.
Price pressures and politics
The central banks in the region are trying to control the demand in an effort to control inflation. Lower inflation ensures price stability. Politics in Latin America is very sensitive to price stability. Price inflation has an unsymmetric impact on society with the vulnerable sections being the worst impacted. This foments political discontent and instability.
Policymakers have been making tough choices throughout 2022 as the economy needed a stimulus after the pandemic. However, there is no macroeconomic tradeoff they have to worry about while fighting inflation.
The central banks are being firm in their interest rate hikes to control inflation. They have done most of the heavy lifting when it comes to this issue. These issues also need to be addressed through policy and not just with banking measures. This is where Latin America needs to break away from the past completely and try a few innovative solutions.
Policy and price control
The region needs to take on a prudent fiscal policy to ease the pressure on the central banks to control inflation. Domestic demand can be slowed down with a contractionary fiscal stance. Strategic budget cuts that do not affect welfare policies are essential. This will give central banks more space with the interest rates. They can bring the rates down sooner, which will strengthen the fundamentals of the banking sector. It will also reduce public debt and prepare the banking system for the next economic shock.
