Navigating the Global Inflation Comeback: Challenges and Strategies
Explore the reemergence of inflation on a global scale, examining its impact on macroeconomic policies, social indicators, and political stability. Discover the trilemma facing Latin America and the implications of inflation on supply chains, labor markets, and imported goods. Delve into the implications of unbalanced macro policies and the role of central banks in managing economic uncertainty.
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The inflation comeback: Global sources, local therapies BANK OF ALBANIA / LSE CONFERENCE OCTOBER 27 EDUARDO LEVY YEYATI, UTDT
Latin Americas trilemma Macroeconomic: Adjust to contain inflation & reduce fiscal deficits and indebtedness. Social: Improve social indicators after years of subpar growth and rising poverty and inequality. Political: Rebuild the social contract to revert the discontent with liberal democracy and the mistrust in the political system.
Inflation: The litmus test The demand side: Fiscal stimuli (the pandemic transfers financed by money issuance or debt). Central bank passivity (persistence of liquidity conditions that brought rates to historic lows). Complacency (spend now, bring the receipts later) r < g
U.S. 12 10 8 6 4 2 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 (2) (4) nominal GDP growth nominal interest rate
Brazil 18 16 14 12 10 8 6 4 2 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 nominal GDP growth nominal interest rate (selic)
Inflation: The litmus test The supply side: Supply chain disruptions and rearrangements in GVC that created input supply deficits and higher prices for goods and services. Labor shortages due to long covid, greater quit rates, weaker participation and labor supply changes that are still unclear. Greater sensitivity to imported inflation: Impact of Russia's invasion of Ukraine on prices of food, energy and fertilizers. GFC: pass-through of dollar strength to prices (the flipside of the US) Inflation inertia (rents in the US, partial wage indexation in Chile or Uruguay, de- anchoring of expectations, etc.)
Unbalanced macro policies Demand shocks are typically addressed with a mix of fiscal and monetary policies, but in countries coming from years of growth underperformance, social unrest, and weakening political representation limit the social and political space for fiscal consolidation The main burden falls on the central banks. Monetary overtightening and fiscal under-adjusting.
Inflation, rates & fiscal balance 35 20 30 15 change in primary balance 25 change in interest rate 20 10 15 Brazil 5 10 Chile 5 - 0 5 10 15 20 25 30 35 0 0 10 20 30 -5 (5) change in inflation change in inflation
Persistent supply shocks The policy response to the multiple supply shocks is more problematic Macro policy is ill-designed to address them. Structural adjustments require time. Food subsidies and energy caps are limited by the lack of fiscal space. Even the appreciation card (better ToT for in the case of commodity exporters & monetary tightening in general) is ruled out by the dollar strength. Is that why the early movers are not getting much in return?
Brazil 14 12 10 8 6 4 2 0 Chile 14 12 10 8 6 4 2 0 US 14 12 10 8 6 4 2 0 1/1/2021 2/1/2021 3/1/2021 4/1/2021 5/1/2021 6/1/2021 7/1/2021 8/1/2021 9/1/2021 10/1/2021 11/1/2021 12/1/2021 1/1/2022 2/1/2022 3/1/2022 4/1/2022 5/1/2022 6/1/2022 7/1/2022 8/1/2022 9/1/2022 rate inflation
The inflation comeback: Global sources, local therapies BANK OF ALBANIA / LSE CONFERENCE OCTOBER 27 EDUARDO LEVY YEYATI, UTDT
