Inflation Now a Concern for Latin America

Comparisons of economic performance in Latin America, Europe and North America cannot be continued. As Latin America continues to lead, with an average growth of about 4% over the past four years, the situation in Europe and North America is deteriorating. European and North American governments are struggling to maintain budgetary spending, economies are struggling to get out of the recent recession, and, in fact, a number of fiscal stimulus packages, to put it mildly, have limited impact.

The situation in Latin America is quite different, and experts predict strong economic growth in the future. This week, however, we have seen Brazil’s central bank condemn inflation and a possible increase in short-term key rates.

The dangers of inflation

Uncontrolled inflation can cause untold damage to the economy, as we saw in the 1990s, when Brazil was on the verge of collapse. It does not matter how strong the major economies are, because high inflation, i.e. double-digit inflation, as in the 1990s in Latin America, can destroy economies and destroy the prospects for the future. On the one hand, it’s good to see that Brazil’s central bank raises the issue of inflation before it really becomes a problem, will it really become a problem?

Comparing Brazil’s current base rate of 7.25% with base interest rates close to zero in the UK, US and other parts of Europe, it is difficult to justify how Brazil’s central bank may even consider raising short-term interest rates. However, this is before we look at the inflation rate, which currently stands at 6.31% compared to the expected economic growth of 3.1% this year and 3.65% in 2014.

Latin American economy

Average growth in Latin America in recent years has been about 4%, with the exception of a slight drop in 2012. Economic growth may be slightly below 4% in 2013 and 2014 if estimates for Brazil are too favourable, but these are still very positive figures, especially compared to Europe and North America.

Many people seem to forget that although Latin America now has a more prominent place in the international trading arena, there is still much to spare on efficiency. Latin American governments have tried to reduce bureaucracy, open markets to outside investors, and indeed, sooner or later, large investments in infrastructure projects will be required. Thus, even if, for example, the Central Bank of Brazil is tempted to raise key short-term interest rates, the potential targets of the cuts and their impact on the economy will be partially offset by future infrastructure, employment and efficiency expenditures.

Emigrants to Latin America

Expats from Latin America will look at the figures for Brazil and other major Latin American countries, compare them with their former countries of origin and wonder what the problem is. In truth, there are no problems in the short term, although the outlook for inflation in the medium to long term is somewhat more uncertain. In many ways, we should be grateful that Latin American governments are now taking the initiative rather than responding to inflation, and are really trying to solve the problem before it becomes a serious problem.

A small increase in inflation in Latin America is unlikely to have a major impact on the number of expats. The long-term outlook for Latin America has improved dramatically in recent years, and while Mervyn King, the outgoing head of the Bank of England, suggests that the UK is on the road to recovery, it will take many years at best.

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