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Why Inflation Is Scaring Latin America If Not the Fed

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The U.S. Federal Reserve, like many other central banks, sees inflation from the reopening of economies disrupted by the pandemic to be “transitory,” and it’s not expected to raise interest rates until at least next year. Latin America’s policy makers, by contrast, are rushing to reverse ultra-low borrowing costs. Since late June, central banks in Mexico, Peru, Colombia, Chile, Uruguay and even Paraguay followed the early move by Brazil and increased rates. Latin America was perhaps hit harder than any other region by Covid-19 and is experiencing a quick economic rebound that puts pressure on prices. Other reasons for the difference, though, may have to do with the continent’s high levels of inequality, informality and political instability -- together with a history of inflationary bouts deeply etched into the collective economic memory.

Around the world, prices have been rising faster than usual as the end of many pandemic-related restrictions released pent-up consumer demand that disrupted supply chains have struggled to meet. Some factors have affected Latin America in particular. For instance, the global rally of food and energy prices has had a disproportionately large impact on the world’s most unequal region: food prices make up a greater share of inflation indexes in Latin America than in advanced economies like the U.S. That means that soaring food prices -- beef is up 43% in Brazil -- have played a larger role in overall inflation.