1/17/2024 0 Comments Vox videos on latin americaThe fiscal stimulus of 2020, which was essential to support economies during the pandemic, has been mostly withdrawn, but fiscal policy this year is expected to be broadly neutral in most countries. As recent IMF research shows, fiscal tightening makes it possible for central banks to increase rates by less to bring down inflation. To assist central banks in their battle against inflation, fiscal policy could play a bigger role through a more countercyclical stance this year. This will guide inflation back to target by late 2024 or early 2025. Interest rates will likely need to remain high for much of this year and, in some cases, even into next year. However, with inflationary pressures proving persistent, central banks will need to remain resolute in their fight until there is an unambiguous downward path for prices. Given the usual lags between interest rate increases and their effect on economic activity, the full impact of the tightening that has already been undertaken should be seen most clearly during the course of this year, contributing to slower growth this year. Furthermore, the recent financial stresses in some advanced economies could lead to tighter global financial conditions, which will further help cool demand. This will inevitably require cooling the labor market.ĭecisive central bank rate increases have already done the heavy lifting. Policies should be aimed at restraining demand to bring it back into line with potential output. With inflation-and especially core inflation-running considerably above target and economies operating above potential, policymakers no longer face the macroeconomic trade-off of 2021 and early 2022, when fighting inflation was at odds with the need to support the recovery from the pandemic. In the current juncture, this requires slowing domestic demand. Restoring price stability is paramount to a healthy economy and protecting the most vulnerable. While most countries in the region have made important strides in price stability in the last two decades, the region’s history is full of examples of how high inflation can destabilize the economy and fuel inequality by hurting vulnerable groups most. Strong domestic demand, rapid wage increases, and broad-based price pressures all point to a risk that inflation in the region could remain unacceptably high. At the same time, output is at or above potential, and short-term inflation expectations exceed central banks’ target ranges. Labor markets are tight, with employment firmly above its pre-pandemic levels. Progress in bringing down core inflation, which excludes food and energy, appears to have stalled. However, this drop mostly reflects the fall of commodity prices from their peaks. To mitigate the risk that inflation becomes entrenched, fiscal policy can help monetary policy in reducing demand pressures.Īfter peaking at 10 percent in mid-2022, headline inflation in the largest Latin American economies has slowed to 7 percent in March. Price pressures that accompanied last year’s brisk economic activity appear to have peaked, but underlying inflation remains stubbornly high, disproportionally hurting low-income households who spend most of their earnings on food. Growth in Latin America is projected to slow to 1.6 percent this year after a remarkable 4 percent in 2022. This article was previously published in the IMF Blog, on April 13, 2023. While monetary policy has played its part, lowering fiscal deficits would also help lessen the cost-of-living crisis. Taming inflation requires slowing down demand.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |