• Much of the Northern Hemisphere is in full summer holiday mode. That isn’t the case in the Latam region, however, where there is no vacation from inflation.
  • Mexico’s Banxico and Peru’s BCRP are the latest central banks to raise key policy rates.
  • And while there are encouraging nascent signs of “peak inflation” in some countries, central banks must remain vigilant and persevere in their fight to restore price stability.

While much of the Northern Hemisphere is in summer holiday mode, that is not the case in the Latam region. And though markets welcomed better-than-expected news on the US inflation front (leading Scotiabank’s Derek Holt to wonder if markets over-reacted), it is premature for a flight deck declaration of victory in the war on inflation. Inflation isn’t taking a holiday.

At the global level, the Bank of England laid out a remarkably candid assessment of what this is likely to entail. Lest there be any doubt, the BoE’s report makes for sober reading. Fed communications, meanwhile, have stressed that peak inflation is not the endgame. Bringing inflation back down to target levels is likely to take some time.

In the Latam region, higher year-over-year inflation in July locked-in a second 75 basis point rate hike by Mexico’s Banxico. As Scotiabank’s team in Mexico City note, however, a moderation of inflation on a month-on-month basis could be a sign that inflation has peaked. Whether that is the case remains to be seen. Regardless, it has led the central bank to keep its options open with respect to the size of future rate hikes. Our experts now expect the next policy meeting in September to conclude with a 50-bps increase.

In Peru, the BCRP also raised its policy rate on August 11, though by 50 bps. As Scotiabank’s economists in Lima point out, grounds for cautious optimism that inflation may have peaked can be found there too. If that felicitous outcome indeed materializes, the central bank could hit “pause” on further rate hikes. But our team cautions that result is conditional on inflation easing, with the BCRP’s policy remaining data-dependent. In any case, the central bank’s revised scenario shows that inflation is likely to remain above inflation targets for longer. 

High inflation is also having an effect on consumer confidence and economic performance across the region. In Colombia, consumer confidence has weakened in part owing to inflation eroding real wages and savings. In Mexico, flagging confidence may likewise account for weaker consumptions and investment. And in Peru disappointing housing sales may reflect the higher interest rates needed to contain persistent price pressures, although vehicle sales provide some reason for optimism. At the same time, the need to protect lower-income households from the damaging effects of high inflation, especially rising prices for foodstuffs and other necessities, is cited as a reason for tax reforms in Colombia.

A year ago—even just six months ago—there was a lively debate over whether inflation was transitory or persistent. That debate has been decided in favour of the persistence side. But, make no mistake, inflation-targeting central banks with clear price stability commitments will eventually prevail. As the forecasts of Scotiabank teams throughout the region project, inflation will return to target. That said, bringing inflation down will take considerable time. And while nascent signs of “peak inflation” are certainly welcome, continued vigilance is needed. There is no vacation from the inflation battle.

Central banks in the Latam region and around the globe must persevere in their fight. To channel Winston Churchill, peak inflation is not the end of the fight; it is not even the beginning of the end; but it may just be the end of the beginning.

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