ECLAC warns of inflation problems for region

SANTIAGO, Chile, August 29, 2008 – Economic Commission for Latin America and the Caribbean (ECLAC) has pointed to rising inflation posing problems and policy dilemmas for countries in Latin America and the Caribbean and urged regional governments to urgently address the situation.

ECLAC said in its Economic Survey of Latin America and the Caribbean 2007-2008 that the main challenge is combatting inflation that has been “imported” through high international prices of basic commodities, such as oil and food.

According to ECLAC, after gradually falling since 2002, inflation in the region climbed to 6.5 per cent in 2007, and in the 12 month-period up to June 2008, had already accumulated an 8.9 per cent increase. It said the situation was affecting almost the entire region.
Inflation rates in Latin America and the Caribbean countries vary from five to 32 per cent, in the 12-month period to June 2008, while the rise in food prices in the region reached 15.7 per cent during that same period, having increased 10.7 per cent in 2007.
“Escalating inflation raises several concerns. First, it affects disproportionately the lowest income population, given its strong impact on food and oil. Secondly, inflation causes uncertainty, deteriorating the investment climate and long-term growth. Lastly, anti-inflationary policies may lead to significant short and medium-run costs, in terms of growth and employment,” ECLAC said.
Faced with this scenario, several countries in the region have adopted more contractionary monetary policies, and some suggest that fiscal policies also adopt an anti-inflationary focus by reducing expenditure and taxes on certain commodities, and introducing subsidies or compensatory instruments.
But the problem created by this approach was highlighted in the survey. ECLAC said that given that most inflation today is “imported”, curbing domestic demand may limit its spread to the rest of the economy, but makes it difficult to avoid its impact on economic activity.
It is against this background that ECLAC said that a successful anti-inflationary strategy requires harmonising the goals of fiscal and monetary policy.

“If governments were solely to raise interest rates to restrict aggregate demand, the increase required could be too steep and negatively affect investment and future growth. Additionally, in the context of a free exchange rates and capital flows, currency appreciation induced by high interest rates may have negative consequences on the competitiveness of export and import-substitution sectors,” it said.
ECLAC suggested that governments, to the extent of their fiscal possibilities, ensure funds for poverty reduction programmes, training human capital and expand infrastructure.