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The reasons of the inflation in Latin America. This is why the market is more expensive

Since 2021, most countries in the region have been experiencing an inflationary phenomenon. What are the reasons for an inflation in Latin America?

Since 2021, most countries in the region have been experiencing an inflationary phenomenon. What are the reasons for an inflation in Latin America?

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Photo: Unsplash

LatinAmerican Post | Santiago Gómez Hernández

You may have seen that in your country the prices of food, transportation, supplies, and many others have increased. other products or services. Well, this is not only happening in your country. Latin America is going through an inflationary phenomenon that is evident in the increase in prices and in the devaluation of local currencies. What are the reasons why the entire region is going through this same phenomenon?

By 2021, ECLAC (Economic Commission for Latin America and the Caribbean) reported general inflation of 7.2%, without even taking into account countries such as Argentina, Venezuela, or Haiti, which suffer from chronic general inflation. Something that the same organization estimates will be similar in 2022, where the asymmetries between the countries will be accompanied by the difficult economic reactivation that all nations face.

Why is inflation in Latin America?

The reasons for inflation may be several, but in short, it is because at some point in the supply chain, the supply is smaller than the demand and this is what has happened in several crucial points of the economies of the region. For example, the droughts that Brazil faced during the past year, increased the demand for fuels due to the risk of energy supply from hydroelectric plants.

The increase in fuel prices means that the transport of all products also increases in price. This has also happened with the crisis in Ukraine that has been pitting Russia (one of the main oil and gas producers) against the West, which has also caused an increase in speculation.

Also read: The most devalued currencies in Latin America in 2021 Published: - Jan 08, 2022

On the other hand, Mexico, with an inflation of 7.36% year-on-year (the highest in 20 years), explained that this is a phenomenon that he has inherited from the United States and its strong dependence on its northern neighbor. Additionally, the crisis in the supply chain that has been hitting global trade and an increase in demand are the main causes of the country.

Colombia, for its part, has blamed the social crisis during the protests, the COVID crisis, and the repercussions on domestic production and the increase in imports, as one of the determining factors of the inflation that the Andean country is experiencing. Colombia registered 5.6% inflation last year, the highest in 5 years.

But, one of the economies facing the worst outlook is, without a doubt, that of Argentina. A country mired in hyperinflation (50.9%), surpassing the now dollarized Venezuela, has set off alarms in the area. The peculiarity of the southern country is its difficulty in paying its foreign debt, which seems to lead to default (non-payment of its obligations). This creates a risky scenario for investors and foreign capital and therefore a decrease in investment. So, a decrease in the arrival of dollars increases the devaluation of the currency and the inflation in the prices of imported products. This also hits domestic products that depend on international supplies.

How to fix inflation?

Various countries try to combat devaluation and inflation in different ways. For example, some countries decide to put up barriers to buying dollars or the outflow of capital, but the repercussions can be: even less foreign investment and a black market for foreign exchange.

On the other hand, National Banks can raise interest rates, thus encouraging foreign capital to lend money in the country, speculating a higher return. However, this can also create a slowdown in the economy, as borrowing becomes more expensive and investment decreases.

Another alternative that countries are looking for is the opposite of printing money: holding it. By reducing the available money supply, it makes the existing one much more desirable. This can also bankrupt companies by increasing the value of wages, especially exporters since prices are less competitive abroad.

However, the best long-term solution is to increase exports. With an increase in interest in buying national products and services. For this, a deep change must be experienced, and it is not feasible to achieve from one moment to another.

This is why the current governments will have to choose which path to take to solve or combat the generalized inflation that Latin America is experiencing. This, without affecting the majority of the population or creating problems in the future.