MercoPress. South Atlantic News Agency

Latam inflation caused by growth “beyond potential”

The International Monetary Fund, IMF has called on Latinamerica's central banks to send clear signals that their main objective is fighting inflation and not to blame exclusively international rising prices.

The Assistant Director of the Western Hemisphere Robert Rennhack speaking in Bogota, Colombia said that following four years of strong sustained growth many countries have expanded beyond the potential of their economies, which is a clear indication that excess demand is fueling inflation. Rennhack added that the region is undergoing a growth slowdown process which should stabilize in the range of 4.5% to 5% for 2008, when last year expansion was 5.6% with a growing tendency for inflation. "It's very important not to only blame outside prices and argue there's not much that can be done, because monetary policy and overall policies can play a key role in containing inflation", he emphasized. "The crucial point is for the Central Bank of any country to send a very strong and clear signal to the market that its main objective is inflation and that not much attention is going to be paid to the exchange rate". Rennhack argued that following four years of strong growth many countries GDP is expanding at rates beyond potential, clearly reflecting excess demand. "World food and fuel prices help to partially explain domestic inflation, let us say a third of that index, but also domestic conditions must be taken into account", said Rennhack speaking before Colombia's Bankers Association. He also warned the region should prepare for a fall in commodities prices which can take place because of a general worldwide economic slowdown, since those exports have been essential for sustaining expansion in the area. The IMF official said that if commodities prices drop between 20 and 30%, which is not unconceivable, Latinamerica's economies could suffer a retraction in growth in the range of two percentage points, which "would be extremely serious". Most countries in the region are feeling the pinch of food and fuel prices in their consumer prices index and are becoming increasingly aware that inflation, as in the "lost decade" of the eighties, has resurfaced as the main challenge. Countries in the region seem therefore more inclined to consider a tightening of monetary policy and containing government spending which could effectively have an impact on the level of consumption and growth. Last month's consumer prices index shows that in Brazil inflation was 0.79%, highest May since 1996. In Mexico prices increased 0.11% accumulating 4.95% in the last twelve months, highest since 2004. In Peru inflation was 0.37% compared to 0.15% in April and above analysts forecasts. Venezuela with the highest inflation in the region jumped 3.2% in May, up from 1.7% in April and 12.4% so far this year. In Chile and in Uruguay, 1.2% and 0.87% respectively inflation was far beyond expectations in spite of a range of measures adopted including tax rebates and subsidies. The official May percentage in Argentina was 0.6%, but the Statistics office has lost all credibility, given suspicions of manipulation or "creative accounting", and for the private sector and consumer associations the percentage could be very well be double that figure. Inflation expectations for 2008 range around 30%.