Rising U.S. Dollar Driving Up Inflation in Latin America

Latin America may not slip deeper into turmoil because monetary frameworks have improved substantially over the past two decades.

The rising U.S. dollar and decreasing commodity prices are weighing down on Latin American economies, with a vast majority of countries in the Western Hemisphere struggling to push down inflation.

According an analysis of Latin American economy by two regional analysts of the International Monteary Fund (IMF), the more the U.S. dollar rises in value the weaker become Latin American currencies. For the regional countries, expensive U.S. dollar is inflating the price of imported goods and services.

“Prices are on the rise in Latin America while they stagnate in the rest of the world,” the report stated. Inflation has remained stubbornly above central bank targets in some Latin American countries, particularly in Venezuela and Argentina.

Yet the report says Latin America may not slip deeper into turmoil because “monetary frameworks have improved substantially over the past two decades, the rate at which currency depreciations are passed through to domestic prices is much lower than in the past.”

Stronger and more independent central banks in the region, the report says, have been able to better anchor inflation expectations, thus preventing increases in the price of non-tradable goods following depreciations.

“This largely explains why the inflationary impacts of the recent episodes have been so modest despite the extent of currency depreciations in countries with well-established inflation targeting regimes, such as Chile, Colombia, Mexico, and Peru,” said the report titled Regional Economic Outlook: Western Hemisphere .

The IMF suggests central banks that they remain trustworthy and hike interest rates whenever they expect inflation to go up. “If central banks clearly communicate the drivers that are pushing inflation above target and the reasons behind their interest rate decisions, monetary policy can remain accommodative,” the report said.

Most regional central banks, according to the report, have responded to increasing expectations by hiking rates modestly, underscoring their intention to do what is necessary to fulfill their mandates.

Sign up for our Nearshore Americas newsletter:

Tags