Inflation storm: the worst is yet to come


Tomas Cuesta | AFP

The developed West, which led the world to an aggressive rise in interest rates, is now warning Latin America: this is for the long haul, so tighten your belts.

First about the consequences. Argentina reached triple digits with an annual growth rate of 104.3% in the consumer price index (CPI) of 21.7% for the first quarter of 2023, which is 5.6 percentage points higher than the 16.1% recorded for the same period in 2022. It is cheaper to fly from the northernmost point of the country to the southernmost point than to buy sneakers. In Colombia, the annual CPI in March was 13.34%, the highest since 1999, with the cost of basic goods in Colombians' food basket rising by 28.1%.

Inflation in Mexico fell to an annualized 6.85% in March, the lowest level since October 2021, but CPI remains above the National Bank Banxico's target of 3% plus or minus one percentage point.

Chile's annual core inflation rate, excluding food and energy, rose to a four-month high of 9.4% in March 2023, up from 9.1% the previous month. On a monthly basis, core prices rose 1.4%, compared with a 0.2% increase in February.

Brazil continued to lower the indicator in the first quarter and in March inflation was 4.65% year-over-year, almost one point less than in February (5.60%). Despite the moderation, inflation in Brazil remains above this year's target of 3.25%.

Six months ago, the International Monetary Fund (IMF) warned the world that "the worst is yet to come" in terms of economic problems, and called for "belt-tightening." The IMF said that the fall in overall inflation in the region's biggest economies to 7 percent in March from 10 percent in mid-2022 is mainly due to lower commodity prices, while core inflation, which excludes food and energy, remains high. The IMF's forecast is that 2023 will be worse than the previous year and likely relates to expectations at the average philistine level.

Most of Latin America is not currently facing an economic crisis. There is no deep recession, no massive job losses, no hyperinflation. In fact, the IMF's World Economic Outlook, released the week before last, predicts Latin American economic growth of 1.6 percent in 2023. And Brazil's economy - historically the continent's largest - won't grow more than one percent, and Mexico's will grow less than two percent this year.

Regional financiers believe that much of the credit for keeping inflation low goes to the central banks of Latin American countries, which have become adept at hyperinflation and economic crises, and were among the first in the world to respond to rising global inflation. Avoiding major economic crises, they have, however, fallen into a long period of decline or stagflation related to the food basket of their populations. For example, a study by the United Nations Food and Agriculture Organization (FAO) found that March 2023 was the 18th consecutive month in which food prices exceeded 120 points, the longest sustained period of high food prices in 50 years. As the Spanish newspaper El Pais noted, Latin America is the region where food price inflation has hit the hardest in the world. At least 57 million people in the region are food insecure, and rising prices are affecting the lifestyles of many more families. While the price of the consumer basket is rising, the prices of minerals and crops are falling. Compared to the highs of 2022, oil is down 27%, copper 24%, zinc 28%, nickel 33%, silver 25%, gold 14%, wheat 29%, soybeans 10% and corn 10%. A notable exception is gas, the price of which has risen sharply since the beginning of the Russian special military operation in Ukraine - up 79% in the U.S. market and 109% in Europe.

Falling commodity prices are usually a harbinger of economic hardship in Latin America, since commodities remain the region's main export and represent the most important source of international reserves and government revenue. North American financiers and analysts see "the Russian invasion of Ukraine" and "Chinese economic destabilization" as the main causes of the general turmoil, which "continue to overshadow the world economy. At the same time, sanctions imposed long before the Russian special military operation and affecting global trade and economic relations, traditional U.S. protectionism and dollar pressure are not taken into account.

And there is another factor that narrow-minded American strategists are not talking about. Washington is totally uncomfortable with the political "pink wave" that has won in the main Latin American countries, threatening to sink the Monroe Doctrine. Washington does not want to think about equal relations with Latinos. And resorting to tried-and-true methods is no longer an option. Fascist and authoritarian coups have exhausted themselves, the ability of the U.S. government and corporations to support the national economy is almost minimal, and the artificial growth of the dollar causes currency idiosyncrasy.

Where should the "poor White House" go? Rising interest rates by the U.S. Federal Reserve and major central banks, the issuers of the currencies in which most debt is denominated, have seriously added to the debt burden. The main vulnerability of the "Global South" that prevents the achievement of self-sufficiency is the dependence, often bondage, on the dollar-centric financial system and the chronic lack of investment and financial resources, as financier Alexander Losev rightly wrote in the Kommersant newspaper. Considering that roughly 35% of the world's debt has a floating rate that depends on U.S. monetary policy, last year's cycle of rising rates added another $3 trillion to the world's debt service costs.

By March 2023, Latin America and the Caribbean had $2.673.88 trillion in external debt, according to German market and consumer data firm Statista. In 1989, economist John Williamson of the Peterson Institute for International Economics (PIIE), USA, coined the term "Washington Consensus", which was recommended by IMF and World Bank management for use in states experiencing financial and economic crisis, especially in Latin America. The IMF began to provide the states on the verge of default with credit assistance at relatively moderate interest rates under one condition - that they carry out radical economic reforms and complete economic liberalization. The countries that agreed to the terms of the "Washington Consensus" condemned their economies to long-term stagnation. And those that refused to "play by the rules" - they did not follow the IMF and WB recommendations and chose global economic integration with the fullest possible preservation of sovereignty - are now the continent's leaders in terms of economic growth rates.

Mexican President Andrés Manuel López Obrador organized an intercontinental meeting in early April to solve the problem of inflation. It was a basically non-binding online forum that brought together the leaders of Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Cuba, Honduras, Mexico, Venezuela, and St. Vincent and the Grenadines. They are all members of the Alliance of Latin American and Caribbean Countries against Inflation (APALCI). There were many common diplomatic words that concealed the concrete aspirations of Latin Americans and their leaders to jointly confront the inflationary crisis affecting the region. The fear of a "сlay Monroe," no matter what, has not been overcome. Especially since there is no quick fix for inflation, and some of the center-left presidents attending the meeting are likely to resort to protectionism rather than the economic integration strategy suggested by these discussions.

Unfortunately for Latin American leaders, regional governments - both center-left and center-right, much less left and right - can do little in the near future to accelerate economic growth and curb inflation. The global environment is tough. Improving growth and getting out of the spiral of high inflation requires fairly difficult decisions for the benefit of national elites and national interests proper, which are not feasible in a matter of months or perhaps even years, but require a firm decision. But one thing is what they want, another is what they can, and a third is what they will allow. How to stay afloat, stay out of debt bondage, and survive? This is the question of the day. And its solution depends entirely on the Latin American governments themselves.