Inflation concerns refuse to fade

Inflation is on the rise throughout most of Latin America. For now at least, this has been driven almost entirely by an increase global commodity prices, which has quickly passed through to headline inflation by virtue of the comparatively large weights that food and energy carry in the CPI basket. But while the pick-up in food and energy inflation should start to fade over the second half of the year, core price pressures look set to build. After all, with policymakers likely to resist any further appreciation of nominal exchange rates, there is a growing risk that renewed upward pressure on real exchange rates in the region comes through via a pick-up in inflation and asset prices. The policy response to the inflation/inflows challenge is, however, unlikely to be straightforward. Conventional measures – such as gradual interest rate hikes and tighter fiscal policy – will probably be implemented. But these measures will continue to be supplemented with unorthodox tools, including further targeted capital controls, higher bank reserve requirement and even caps on bank lending.