Navigating high inflation: A joint analysis of inflation dynamics and long-term inflation expectations in Latin America

Abstract

The return of high inflation in Latin America (and worldwide) since 2021 has renewed concerns about the persistence of above-target inflation and a potential de-anchoring of inflation expectations. This paper shows that trend inflation estimation using forward-looking information can offer important insights for the understanding of inflation dynamics and long-term inflation expectations. Our analysis for 5 large LATAM economies (Brazil, Chile, Colombia, Mexico and Peru) reveals that a large part of the high inflation observed over 2021–23 mainly reflects transitory influences, and the stability of long-term survey expectations is broadly in line with persistent inflation trends. The risk of a de-anchoring of expectations in those countries therefore seems to be limited. Our findings provide useful information for both monetary policy and market participants in LATAM countries, as well as for central banks and investors worldwide.

Keywords

• Trend inflation
• Survey inflation expectations
• State space model
• Stochastic volatility