Sunday 5 February 2023

Rising inflation in the US and China puts pressure on prices in Costa Rica

The increases in inflation in the United States and China will impact Costa Rican consumers since between both countries they concentrate more than half of the products that are imported

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4 February 2023 - At The Banks - BCCR

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QCOSTARICA – The rising inflation in the United States and China will impact Costa Rican consumers, given that 38% of the products imported come from the northern country and 15% from Asia.

In the United States, the interannual rate (of each month with respect to the same month of the previous year) of the price indicator shot up, in October, to 6.3%; this is the largest increase in 31 years. While last November the year-on-year increase reached 6.8%, the highest in 39 years, the U.S. Labor Department reported on Friday, December 10.

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In China, according to the Reuters report on December 8, consumer prices recorded their greatest increase for 15 months in n November, with an increase of 2.3% year-on-year.

This is a significant jump compared to the 1.5% in October and the most notable growth since August 2020, especially linked to the increase in prices in the food sector, according to the head of the statistical office, Dong Lijuan.

“From the United States we import, among other things, fuels and grains (wheat, corn, soybeans), which have a significant impact on inflation,” said Luis Liberman, a partner at the CEFSA consulting firm.

From China, mainly cell phones, laptops, television screens, rolled iron or steel products, and wheeled toys such as tricycles, scooters, skateboards and pedal cars were imported in 2020, according to data published by the Ministerio de Comercio Exterior (Ministry of Foreign Commerce).

Liberman added that the consensus has changed. Before it was believed that these increases were transitory, but now it is that they are pronounced and longer-term compared to what was expected.

For his part, economist Fernando Naranjo, a partner at the same consulting firm, added that the increase in external inflation is coupled with internal elements that can also push local prices up.

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“Both (the United States and China) have a worsening of internal inflation, but the other problem is that we have excess liquidity in Costa Rica, so if those idle resources that are in savings accounts, in checking accounts, are channeled to demand goods and services, that will have an additional impact on inflation for internal reasons, not external,” said Naranjo.

For Liberman, if the increases are more pronounced and long-term, then a monetary policy as lax as that of Costa Rica should not be maintained.

“Other countries have already begun adjustments to reduce inflation: Mexico, Brazil, Colombia, the Dominican Republic and in the United States the FED (Federal Reserve) has indicated that the beginning of the end of the purchases of securities is approaching, that is, it would begin to reduce liquidity,” he added.

In Costa Rica, the Banco Central (Central Bank) has promoted an expansive monetary policy to contribute to the recovery of production in the face of the effects suffered by the restrictions generated by the pandemic.

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Part of this policy has been to bring the monetary policy rate (reference and that influences the rest of the market interests) to a historical low of 0.75%.

The next monetary policy meeting of our Central Bank, according to the Bank’s calendar, will be on December 15.

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