Feeling the heat
As inflation rises, policymakers in poor countries face a stern test
It has been a long few months for the emerging world. Punishing temperatures—July was the hottest month on record worldwide, according to a recent analysis—fanned fires on Turkey’s Mediterranean shores and scorched Russia’s wheat fields. Covid19 rages across countries with low vaccination rates. Just 24% of Brazilians, 9% of Indians and 7% of South Africans are doublejabbed. On top of everything else, inflation is running hot, too.
Soaring food and energy prices have pushed inflation to uncomfortably high levels. In Brazil consumer prices are 9% higher than they were a year ago (see chart), more than twice the central bank’s target. In Russia inflation is 6.5%, well above the central bank’s aim of 4%. Inflation in India, which had been high in 2020, rose above 6% this summer—north of the Reserve Bank’s target range. Policymakers in poorer countries have navigated a fraught path this year. The outbreak of high prices lays another severe test at their feet.
Growth has mostly resumed, despite the continued ravages of covid19. In parts of the emerging world, such as India, output has already regained its prepandemic level. In others, such as Russia, it is expected to do so by the end of the year. Soaring prices for oil, metals and agricultural products have been a boon for commodity exporters. But recoveries have been frustratingly uneven. Better times for export industries have not always translated into broader labourmarket recovery. Business is booming in Brazil’s mining towns, for instance, but the unemployment rate across the country, at 14.6%, has scarcely declined from its pandemic peak.
That, in turn, has placed pressure on governments to extend or even increase spending on relief programmes. Economic growth is boosting tax revenues in many countries, improving the public finances that were battered by covid19. Still, fiscal deficits remain large. A decision in June to expand grain handouts means that India’s central government is likely to borrow more than the 6.8% of gdp expected in the budget for the 2022 fiscal year. Brazil, which borrowed an eyewatering 13.4% of gdp last year, has extended its emergency cash transfers. Chile and Colombia, which limited their borrowing to a modest 7% of gdp in 2020 last year, are planning to borrow about as much or more this year, according to the Institute of International Finance, a bankers’ group.
When you combine more money flowing through the economy with supply disruptions, though, the result is inflationary pressure. Emergingmarket central bankers, like their richworld counterparts, argue that high inflation is merely temporary. But, unlike their advancedeconomy peers, some have not felt comfortable enough to wait and see. They have more recent experience of bouts of high inflation, and doubt that public expectations of low inflation are as firmly anchored as in rich countries. They have thus moved forcefully to rein in inflation. Brazil’s central bank raised interest rates by a full percentage point on August 4th, on top of three increases of 0.75 percentage points each since March. The Central Bank of Russia also announced a fullpoint rise on July 23rd, also its fourth of the year. Mexico and Peru raised interest rates on August 12th. Other central banks that have held fire are expected to tighten in coming months.
This determination to curb inflation may have kept foreign investors interested. Early this year some economists worried that a roaring recovery in America and the prospect of higher interest rates there could lead to a rush of money out of emerging economies: an echo of the “taper tantrum” of 2013, when the Federal Reserve began normalising monetary policy after the financial crisis. An uptick in American Treasury yields in February and March this year was accompanied by a slowdown in portfolio flows to emerging markets, seemingly presaging worse to come.
That has not materialised, however, and not only because Treasury yields have dropped back from their spring highs. It also reflects a more robust policy framework in emerging economies, and greater resilience to market swings. In recent decades they have built up foreignexchange reserves and limited their dependence on foreigncurrency debt. Most survived a severe squeeze in March 2020, when panicked investors rushed to havens and emerging markets’ currencies tumbled,