Facing Inflation

Carin Zissis
June 17, 2008

Venezuela's new currency, released in early 2008 to stem inflation. (AP Images)

May’s inflation figures are in and causing worldwide concern. And despite indications that Latin America appears better positioned to withstand a global economic slowdown than in the past, rising inflation across the region sparks worries. In recent weeks, several countries undertook a variety of measures to keep at bay the specter of inflation past, which destabilized countries in previous decades. Some countries face a bigger uphill battle than others.

Venezuela sits among them. Last year, Venezuela’s economy fell prey to double-digit inflation, hitting more than 22 percent. Neither price controls nor the January 2008 creation of a new currency called the “Bolivar Fuerte” reined in the rising rates, which reached over 31 percent between May 2007 and May 2008. Since the release of May figures, President Hugo Chávez’s government took a number of steps with an eye toward slowing inflation, including an end to a tax on financial transactions and changes in rules to facilitate imports. Chávez also replaced Finance Minister Rafael Isea with Alí Rodríguez Araque,  a former president of Venezuela’s state oil company, recent ambassador to Cuba, and a close Chávez ally.

Argentina also faces marked concerns over inflation at a time when the country finds itself in upheaval as a result of a months-long dispute between striking farmers and the government over an export tax on agricultural goods. Strikes began in March and negotiations have repeatedly broken down between protesters and the government of President Cristina Fernández de Kirchner, six months in office. Kirchner’s government says the tax plan could help reduce inflation.

Argentina’s exact inflation rate has been a matter of controversy for several months, with analysts questioning the methodology used to calculate official rates and estimating that inflation rates could be much higher. According to May statistics released by Argentina’s Statistics and Census Institute, inflation hit 4 percent in the first five months of 2008. Yet this rate involved dropping the number of items considered in the consumer price index from 818 to 440. Through what the Economist calls “creative accounting,” official inflation rates remain in the single digits even as analysts forecast prices to rise by as much as 30 percent in 2008. The Telegraph reports that the country could default on its sovereign debt “by stealth” as Argentines begin to draw from their savings to buy dollars or move cash to Uruguay.

While Venezuela experiences runaway inflation—and Argentina faces the possibility of it—other Latin American countries are also experiencing rising inflation, even if at lower rates as a result of rising global commodity prices. Last month, Brazil and Mexico saw consumer prices rise at the fastest rate in three years. In Chile, inflation rose to its highest level in 13 years. Peru and Colombia also face higher inflation rates than previously predicted. In response, central banks continue to boost interest rates.

An analysis by Richard Lapper in the Financial Times examines several Latin American countries that bear the increasingly expensive burden of subsidizing fuel while trying to control inflation. Despite the dangers of rising consumer prices, several experts point to positive signs for the region. Former head of Brazil's Central Bank discusses the optimistic outlook about Brazil's economy in RGE's Latin American EconoMonitor. The World Bank’s Pamela Cox urges countries to remove export restrictions and says Latin America will “overcome this new test” of sustaining growth in the face of global challenges. International Monetary Fund head Dominique Strauss-Kahn recently commended the region for strengthening its fiscal position but warned against allowing “higher inflation from becoming entrenched in expectations and wage demands.”

Strauss-Kahn addressed Latin America’s economic outlook and concerns about inflation during remarks at COA’s 38th Annual Washington Conference of the Americas.

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