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ECONOMY | 10-06-2020 16:32

Inflation in full retreat means Latin America can boost stimulus

Consumer prices fell last month in several major economies in Latin America due to the decrease in demand resulting from the coronavirus pandemic.

Inflation is in retreat across Latin America, creating space for policy makers to provide even more stimulus for their crashing economies.

In a region with a history of out-of-control inflation, consumer prices fell last month in several major economies as the coronavirus pandemic crushed demand.

The drop in Brazilian consumer prices was the deepest in more than two decades, while prices unexpectedly fell in Chile and Colombia. Some of the region’s smaller economies, such as Paraguay, Ecuador and Costa Rica also experienced deflation, while Mexican inflation undershot all forecasts in a Bloomberg survey.

“Inflation is really subdued in Latin America, mostly due to lower commodities prices and very weak demand from the coronavirus outbreak,” said Patricia Krause, Latin America economist at French insurer Coface.

Policy makers have indicated they won’t stand on the sidelines. Mexico central bank board member Jonathan Heath has said the bank will keep cutting its key rate, while Brazil has signalled that both more monetary easing and credit measures are on the cards. Chile is seeking new tools aimed at boosting liquidity.

Inflation expectations

Central banks have cut rates to near zero in Chile and Peru, and to record lows in Colombia and Brazil. Still, there are scant signs of an uptick in inflation expectations.

Analysts expect annual inflation in Brazil and Chile to keep slowing in coming months, while ticking up only modestly in Colombia and Mexico.

To be sure, the region has countries such as Venezuela and Argentina that are still grappling with runaway inflation, but these are now the minority.

Statistics agencies across the region are grappling with the challenge of collecting inflation data with many stores shut, and restrictions on the movement of people. Gathering price data online is harder in developing economies due to the low use of e-commerce, increasing the likelihood of distortions.

“Inflation in Latin America is not dead, but is likely to remain subdued for a prolonged period,” said Felipe Hernandez, a Latin America economist at Bloomberg Economics. “Weak domestic demand and increasing economic slack in the aftermath of the novel coronavirus outbreak and lockdown measures puts downside pressure on prices.”

by Mario Sergio Lima, Bloomberg

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