Inflation Now a Concern for Latin America

The comparison between economic performance in Latin America, Europe and North America could not be further apart. While Latin America continues to power ahead, with average growth of around 4% in the last four years, the situation in Europe and North America is going backwards. European and North American governments are struggling to maintain budget spending, economies are struggling to pull away from the recent downturn and indeed a number of fiscal stimulus packages are having limited impact to say the least.

The situation in Latin America is very different and indeed experts predict strong economic growth for the future. However, only this week we saw the Brazilian central bank airing the subject of inflation and a potential increase in base rates in the short term.

The Dangers of Inflation

Uncontrolled inflation can do untold damage to an economy as we saw back in the 1990s when Brazil nearly collapsed. It makes no difference how strong the underlying economies are because high inflation, i.e. double digit inflation as seen in the 1990s in Latin America, can obliterate economies and ruin the future outlook. Therefore, while on one hand it is good to see the Brazilian central bank broaching the subject of inflation before it actually becomes a problem, will it actually become a problem?

When you compare the current Brazilian base rate of 7.25% against near zero base rates in the UK, US and other areas of Europe, it is difficult to justify how the Brazilian central bank can even contemplate increasing the rate in the short term. However, that is before looking at the rate of inflation which is currently 6.31% against expected economic growth this year of 3.1% and 3.65% in 2014.

The Latin American Economy

Average growth rates across Latin America have been around 4%, with the exception of a small dip in 2012, for the last few years. The rate of economic growth may be slightly under the 4% mark in 2013 and 2014, if estimates for Brazil are anything to go by, but they are still very positive figures especially when compared to Europe and North America.

One thing which many people seem to forget is the fact that while Latin America is now more prominent on the international trading stage, there are still many efficiency savings to be made. Governments across Latin America have been looking at reducing red tape, opening markets to outside investors and indeed massive investment in infrastructure projects is required sooner rather than later. So, even if the Brazilian central bank, for one example, was tempted to increase base rates in the short term the potential fund tightening aim and impact upon the economy would be partly offset by infrastructure spending, employment opportunities and efficiencies going forward.

Expats in Latin America

Expats in Latin America will be looking at the figures from Brazil and other leading Latin American countries, comparing them with their former homelands and wondering what the problem is. The truth is there is no short term issue although the medium to longer term outlook with regards to inflation is a bit more uncertain. We should in many ways be grateful that Latin American governments are now being proactive rather than reactive with regards to inflation and indeed looking to tackle the problem before it becomes a major issue.

Even a slight increase in inflation across Latin America is unlikely to cause any major impact with regards to expat numbers. The long-term outlook for Latin America has improved dramatically in recent years and despite Mervyn King, the outgoing Governor of the Bank of England, suggesting the UK is on the road to recovery, at best this will take many years to fulfil.