Living with Inflation: The New Normal
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Living with Inflation: The New Normal

Photo by:   Annie Spratt, Unsplash
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Sofía Hanna By Sofía Hanna | Journalist and Industry Analyst - Tue, 10/04/2022 - 15:58

As high inflation becomes the new normal, experts forecast an upcoming worldwide recession. Mexico and Brazil, in particular, are in a precarious position given their external debt positions and the rising cost of living. Although central banks continue to battle inflation, if industrial countries do not change course with their restrictive monetary and fiscal policies, there will be no recovery or growth in the short term, warns the International Monetary Fund (IMF).

 

During the year’s second quarter, global output contracted due to the slowdown in China and Russia. According to the World Economic Outlook’s (WEO) baseline forecast, growth will slow from 6.1 percent last year to 3.2 percent in 2022, down 0.4 percentage points. Risks to the outlook are mainly on the downside. Inflation may be more difficult to reduce than expected because labor markets are tighter than expected or because inflation expectations are de-anchoring. The priority of economic authorities should be to control inflation. Although tightening monetary policy will have actual economic costs, delaying this process will only exacerbate them, says WEO. For now, the base inflation projection remains pessimistic. For 2022, it is revised upward to 8.3 percent, according to WEO.

 

BlackRock’s Global Outlook warns that the great moderation is over and a new regime of higher macroeconomic volatility is playing out as the worsening trade-off between fighting inflation and the damaging consequences of these actions becomes clearer. The world has to either focus on growth or on curtailing inflation.

 

This scenario will have greater repercussions in emerging countries such as Brazil and Mexico.  Both countries face pressure in terms of foreign debt and growing cost of living, making it difficult for the population to consume as it did in the past. The Latin American economy is expected to experience one of the steepest declines and will grow by only 2.6 percent this year, compared to 6.6 percent in 2021, according to IMF. In 2023, the region is expected to grow by 1.1 percent. Mexico and Brazil are expected to grow by 1.8 percent each this year, and only 0.6 percent in 2023, according to the United Nations (UN).  


The Bank of Mexico (Banxico) recently increased its interest rates in the country, following the footsteps of the US Federal Reserve (Fed). In addition, the Ministry of Finance announced additions to President Andres Manuel Lopez Obrador’s anti-inflation plan to reduce the impact of the growing inflation on the country’s poorest population.

Photo by:   Annie Spratt, Unsplash

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