Inflation, a growing threat to the poor and vulnerable in Latin America and the Caribbean

As Latin America and the Caribbean (LAC) returned to pre-pandemic levels of economic activity, a disturbing new threat emerged: rising inflation.

The region has gone through a dramatic period of setbacks since March 2020, when it began to feel the effects of the pandemic. It has hit LAC harder than any other region in the world, both in terms of per capita deaths and economic contraction. Poverty has also increased due to the health crisis.

The region has managed to recover significantly through 2021, thanks to aggressive vaccine deployments and the expansion of programs to mitigate the impacts on the most affected populations. However, rapidly rising food and fuel prices could inflict another significant setback on the region’s citizens.

While the Russian invasion of Ukraine has fanned the fire of inflation, most countries have been experiencing symptoms of rising prices since last year. Fuel, as measured by world oil prices, and international food prices have increased throughout 2021, as shown in Figure 1.

In fact, by the end of 2021, median consumer price inflation in the region had almost doubled to 7% from an average of 4% between 2015 and 2019. Inflation has of course affected countries differently. , but all are seeing increases, with the highest rates in Argentina, Brazil, Chile, Uruguay and Venezuela.

In LAC, food and energy were the main contributors to inflation in 2021 . They accounted for more than 90% of inflation in Costa Rica, 75% in Paraguay, 66% in Brazil and nearly 60% in Colombia. Empirical analysis confirms that inflation in the region was strongly correlated with demand side pressures resulting from expansionary policies, as well as supply chain pressures, energy prices and depreciation of the currency.

Inflation is expected to rise further in 2022, mainly due to higher commodity prices and global supply disruptions. Suriname and Haiti, for example, are expected to experience double-digit inflation. Food-importing countries will be more quickly affected by further increases in international food prices.

Why worry about the impact of inflation in the region?

One of the main reasons is that inflation puts a lot of pressure on household disposable income. In LAC, the budget share of food and energy prices in the consumption basket is around 40%, with the highest levels in Peru, Mexico, Brazil and Paraguay, as shown in Figure 2.

Of particular concern are the negative impacts on the poorest and most vulnerable households in urban areas, who spend a large proportion of their total income on food and other staples. They suffer the hardest effects of rising prices. (For a comprehensive view of the impact of inflation and rising commodity prices on poverty, as well as a view of the broader economic picture, see the recent speech by World Bank President David Malpass, at the Warsaw School of Economics).

Inflation in other goods and services, such as those tied to gasoline prices, has also hit consumers everywhere. These price increases also contribute to large welfare losses due to rising transport costs. Worse still, people in Latin America and the Caribbean are seeing soaring food and fuel prices while wages remain on average below pre-pandemic levels.

Rising poverty, food insecurity

In a region where poverty reduction has been abruptly reversed during the pandemic, a major concern is that the recovery that began in 2021 is not helping families rise above the poverty line.
Poverty, defined as living on less than $5.5 a day, fell from 24% to 26.5% between 2019 and 2021, but began to slowly decline in 2022. Now preliminary analysis indicates that poverty levels poverty are expected to remain at 26% in 2022 rather than return to pre-pandemic levels. According to this calculation, nearly 13 million LAC citizens will lose the opportunity to see a significant improvement in their well-being.

Furthermore, there could be many more families at risk of food insecurity and falling into poverty in 2022 due to rising inflation and rising food prices.

Food insecurity during the pandemic was most salient in Caribbean island nations such as Saint Lucia, Jamaica, Haiti and Dominica. Unfortunately, this is likely to be the case again now, as Caribbean countries are highly dependent on food and non-food imports. It could also disproportionately affect the region’s urban poor, as well as many recent migrant populations – including those from Venezuela – who are still struggling to make ends meet in their new homes. Growing food insecurity is likely to deepen the poverty and economic vulnerability of many people in LAC.

A final but important concern is inequality. Inflation tends to hit the poor hardest, while wealthier families have more instruments at their disposal to avoid the worst impacts. This is why inflation is likely to aggravate inequalities. By some measures, LAC is already the most unequal region in the world. Unfortunately, the rise in prices we are seeing today could accentuate this situation, fueling persistent social tensions.
Many countries are responding to rising inflation by trying to influence prices directly – by limiting food exports or keeping fuel prices below those on world markets. This approach can help ease tensions at the national level, but it has a negative impact on global well-being.

Historical experience shows that trade restrictions tend to exacerbate global food crises. They could keep prices lower in one country in the short term, while pushing prices higher in world markets, making the situation worse for others. Keeping gasoline or diesel prices low can help curb social demands, but it’s a costly approach that often mainly benefits groups that need it less. Additionally, keeping fossil fuels cheaper negatively impacts the climate and undermines ALC’s long-term goal of a green growth transformation.

What to do?

To cushion the effects of inflation on the poor, governments should step up their support through well-targeted social protection programs . These programs have been an essential part of the response to COVID-19 and have protected millions of Latin Americans from the worst impacts of the crisis.

Using these types of programs to alleviate the suffering caused by rising food and fuel prices is more effective than the alternatives. However, efforts to prioritize protection of the poor and most vulnerable must be compatible with sound fiscal management, given the higher public debt levels in the region post-pandemic.

Frankly, we don’t know when the current inflation spurt will end. We don’t know how long the war in Ukraine will last or how quickly we can expect other sources of grain, fuel and fertilizer to come into place.
What we do know is that central banks in the region have raised interest rates to dampen demand, which will have a negative impact on the already weak growth rates (the LAC is now expected to grow by only 2, 2% this year, one of the lowest rates in the world). ).

Given the uncertainties, it is important to follow a flexible approach that protects the poor while reducing the overall pressure on budgetary resources. And now may be the time to introduce growth-enhancing reforms to boost investment and create jobs urgently needed to make our region a more equal and prosperous place for all.