- Cecilia Barria
- BBC News World
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Estimates for 2023 are encouraging.
2022 will be remembered by many as the “year of the great inflation.”
In the first half of the year that is ending, with the war in Ukraine underway, inflation skyrocketed throughout the world, especially affecting food and energy prices, reaching a peak in Latin America of 8, 4% in June, the highest level recorded since 2005, according to data from the Economic Commission for Latin America and the Caribbean (Cepal).
That maximum regional level does not include in the calculation the countries that are considered to have a “chronic inflation”: Venezuela, Argentina, Cuba, Haiti and Suriname.
Not only the increase in the price of fuels played a key role in the sudden escalation of the cost of living. Greater exchange rate volatility also played a role, in addition to the traces left by the covid-19 pandemic, which disrupted global supply chains and caused, in many cases, the authorities to put more money into circulation than was available before the crisis. of health.
But by the middle of the year, things started to look up.
The trend was reversed in the second half of the year amid a rapid increase in interest rates adopted with the aim of combating price increases, added to the sharp slowdown in the global economy.
Regional inflation fell to 6.8% in October, compared to the same month of the previous year (what is known as annualized inflation).
And projections suggest that in 2023 inflation will continue to decline.
Panama, the country with the lowest inflation in the region
The country with the lowest inflation in Latin America was Panama: 1.7% in October.
Although the country is used to having historically low inflation levels (which in recent years have not exceeded 2%), Panama was not left out of the bullish wave that swept through the region in 2022.
In fact, the country came to register more than 5% inflation in June, “a gigantic increase for Panama,” says Felipe Argote, professor of macroeconomics at the Inter-American University, in dialogue with BBC Mundo.
In the midst of the rise in the cost of living, the Canal country was the scene of a avalanche of protests when hundreds of thousands of people took to the streets to demonstrate in July against the increase in the cost of living, social inequality and corruption.
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Protesters in Panama protested in July for the increase in the cost of living.
Thus, in the middle of that month, the government agreed to freeze the price of fuel, an unusual subsidy policy in the Central American country, which is used to applying taxes to this type of product.
What happens in the international energy sector is essential for the Panamanian economy, given that “the country imports all the fuel it consumes,” says the economist.
That is why in Panama the increase in prices is considered “imported inflation”.
Starting in July, the cost of living began to gradually decrease, following the trend of other Latin American economies.
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Panama is a dollarized economy.
There are several reasons that have kept the price level in the country well below the rest of the economies in the region.
One of them, argues Argote, is that “lInflation has remained low mainly because the country has a dollarized economy”unlike most countries in the region.
And as the dollar has strengthened in 2022 against all other currencies, it makes imported goods cheaper.
In any case, despite the fact that inflation is very low, warns the economist, it is also true that real wages have fallen in recent years, unemployment is at 10% and the deep levels of inequality have not diminished despite the spectacular economic growth registered in the last three decades.
Bolivia, the second country with the lowest inflation
After Panama, Bolivia is the country with the lowest annualized inflation in Latin America: 2.9%.
There are several reasons that explain this phenomenon. Contrary to what happens with the currencies of neighboring countries, sometimes subject to strong variations in the exchange rate, Bolivia’s national currency has a fixed exchange rate against the dollar American, set more than a decade ago (US$1 = 6.96 bolivianos).
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In Bolivia, the exchange rate is fixed and there is a wide variety of subsidized products.
The exchange rate has been maintained thanks to the fact that the government supports it by injecting dollars from its reserves into the market.
The strength of the boliviano reduces Bolivia’s cost of importing goods and, in a context of booming food and oil prices on international markets, a strong currency is especially advantageous.
On the other hand, the cost of living has risen very little due to the generous subsidies that the government applies to gasoline and basic basket products.
Another brake on price rises are the export certificates that are required for all products sold abroad.
When their supply in Bolivia at a price that the authorities consider fair is not guaranteed, they can deny the certificate to export, thus forcing an increase in supply in the domestic market that also alleviates inflationary pressures.
The countries with the highest inflation
As it is easy to imagine, the countries that for years have registered the highest inflation levels in Latin America are Venezuela and Argentina, followed by Cuba.
Classified as countries with “chronic inflation”, they have suffered the consequences of a high cost of living for many years and, from that perspective, are not a representative example of the trends that dominated the inflationary wave in 2022 after the start of the war in Ukraine.
If the idea is to look at those countries that traditionally maintained stable inflation levels, but their cost of living skyrocketed in 2022, those who lead the list until October areChile (12,8%) y Colombia (12,2%).
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Inflation in Chile reached a record level of 14.1% in August.
Chile, which used to have price increase levels close to 2% annualized before the pandemic, experienced a historic inflationary escalation this year, which arrived in august tol 14,1%the highest level in almost three decades.
Experts consulted by BBC Mundo argue that there are external and internal causes that explain such an unusual phenomenon in the South American country.
Among the external ones are the failures in the supply chains caused by the pandemic and the rise in fuel prices due to the war.
And on the domestic front, they cite that in 2021 there was a sharp increase in consumption that “overheated” the economy until GDP grew by 11.7% -its biggest expansion in four decades-, amid extensive state aid delivered to the most vulnerable sectors and massive early withdrawals from private pension funds.
In the case of Colombia, the increase in the cost of food is the factor that has driven the wave of inflation the most.
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In Colombia, inflation reached 12.2% in October.
So much so, that a little more than a quarter of the increase in prices is explained by this increase in the family basket.
Other factors that have contributed to the escalation in the cost of living are electricity and gas, services that, despite having prices regulated by the State, have seen their cost increase.
In mid-September, the government of Gustavo Petro announced that for next year the energy and gas regulatory authority will adjust the formulas used to calculate the price of electricity paid by households, in order to reduce tariffs. of electrical energy.
Although, on the other hand, the policies that try to reduce the country’s polluting emissions have created the conditions for a slight increase in the price of gasoline.
Inflation will fall in 2023 in Latin America
“Inflation in 2023 will be lower than in 2022, but not as low as before the pandemic,” José Manuel Salazar-Xirinachs, ECLAC’s executive secretary, told BBC Mundo.
This diagnosis is shared by other international organizations that are projecting not only a decrease in the cost of living in Latin America, but also globally.
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El Salvador, Ecuador and Panama are dollarized economies.
In any case, regions like Europe will be in serious trouble in the coming months due to their strong dependence on energy imports from Russia.
Just as the forecasts point to a reduction in inflation next year, they also suggest a reduction in Latin American growth, which could reach only 1.3%, a very low level for the region’s development needs and the precarious situation in which vast sectors of the population are found.
With the drop in the cost of living, a brake is expected in the increases in interest rates that characterized this 2022 and that reduced the possibilities of accessing loans for households and companies.
For many, prospects for lower inflation in 2023 are good newsconsidering the great loss of purchasing power that has affected consumers.
The problem is that, since this news is accompanied by low growth, economists warn that unemployment could rise.
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The shadow of the recession threatens a third of the world’s economies, according to estimates by the International Monetary Fund (IMF).
For Latin America, despite the fact that economic growth will be lower in 2023, at least the projections suggest that the countries of the region will not decrease.
Except for one: Chile, the only Latin American country to contract.
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