Inflation Pummels Purchasing Power in Central America, Dominican Republic

In October, Honduras and Nicaragua continued with double-digit year-on-year inflation, while in Guatemala the rise in the consumer price index was the highest in 14 years

All countries have experienced inflation over the past year, and Central America and the Dominican Republic are not excluded.
November 14, 2022 | 02:07 PM

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San Pedro Sula, Honduras — Central America and the Dominican Republic have not been immune to the price hikes seen during the past year as inflation pummels citizens’ purchasing power.

In October, Honduras and Nicaragua continued with double-digit year-on-year inflation, while in Guatemala the rise in the consumer price index (CPI) was the highest in 14 years.

Costa Rica, on the other hand, achieved its second consecutive month without registering rising inflation; the Dominican Republic added three consecutive months below the 0.30% threshold; and in El Salvador, despite two consecutive declines, the index remains two points higher than in October 2021, when it was 5.49%.

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In Panama, where uthorities have not yet published the results to the tenth month of the year, the International Monetary Fund (IMF) posited that inflation will be 3% in 2023, after closing at 4.4% this year.

For the rest of Central America, the IMF projects that the CPI rise will be 7.8% this year, dropping to 4.4% in 2023.

“All countries, without exception, are going through a phenomenon of high inflation, and this is an inflationary process with multiple causes that is strongly impacting the purchasing power of most families in Central America,” Pedro Argumedo, economic analyst of the Salvadoran Foundation for Economic and Social Development (FUSADES), told Centroamérica Economía.

Argumedo explained that, mainly, the factors that have put upward pressure on inflation are external, but also internal factors have created different dynamics in each of the countries of the region.

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The trend in Nicaragua and Honduras

In Nicaragua, October inflation was 1.33% (compared to 0.75% in October 2021). Meanwhile, year-to-date inflation stood at 9.08% (compared to 4.27% in October 2021) and inter-annual inflation was 12.16% (compared to 6.41% in October 2021), according to the National Institute of Development Information (INIDE).

For the month-on-month inflation, the twelve divisions that make up the CPI basket were affected, with the highest price increases in food and non-alcoholic beverages (2.23%).

The Central Bank of Honduras (BCH) reported a monthly CPI variation of 0.66%, below the monthly average registered between January and September of this year, which was 0.82%. With this result, year-to-date inflation was 8.33%, while year-on-year inflation stood at 10.18%.

The monthly rate was mainly influenced by increases in the prices of certain perishable foods, such as vegetables and dairy products, associated in part to hurricanes Ian and Julia, as well as some distortions in their trade in the domestic market, the BCH said. In addition, international oil prices continue to impact the fuel price hikes at a national level for both vehicular and domestic use.

Fears in Costa Rica

The Central Bank of Costa Rica (BCCR) forecasts that, for the remainder of 2022 and part of 2023, inflation will remain above the tolerance range with respect to the 4% target proposed by the BCCR.

On October 31, BCCR president Roger Madrigal told local media that “inflation is still high”, but assured that “there are signs that indicate that the maximum was reached in August”.

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Projections indicate that inflation will close the year at 9.4%, and will not return to the BCCR’s target range until 2024.

This year, the BCCR has raised interest rates six times as a measure to combat inflation, following in the footsteps of other central banks around the world.

What is happening in Guatemala and El Salvador?

In Guatemala, the National Statistics Institute (INE) reported that price increases in products, including fuels, have caused year-to-date inflation during 2022 to be the highest since 2008, when inflation in the Central American country closed at 11.36%, although the highest rate ever was recorded in 1986, with 36.93%.

For 2022, the monetary board of the Bank of Guatemala had estimated inflation of between 3% and 5%, but the Russian invasion of Ukraine at the end of February caused a worldwide economic crisis, and which also affected the Central American country, where 70% of products are imported.

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El Salvador has also been impacted by the escalation in prices driven by the war and the economic effects of the Covid-19 pandemic. The country’s central bank forecasts that inflation will begin to decline in 2023 but not stabilize until 2024.

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Inflation in the Dominican Republic

Monetary authorities in the Dominican Republic reported that year-on-year inflation, measured from October 2021 to October 2022, maintained a downward trajectory, at 8.24%, a fall of 140 basis points with respect to the peak of 9.64% observed in April of this year, and is forecast to be around 7% at the end of 2022.

This downward trend in inflation has made the central bank project that inflation will be converging towards the target range of 4%, with a 1% margin of error up or down, before the end of the second quarter of 2023.

Despite the overall slower pace of inflation growth in Central America, the IMF’s most recent Economic Outlook report warned that headline inflation will peak at the end of 2022 and remain elevated “for longer than expected, and decline to 4.1% by 2024″.