Latin America's Long Fight With Inflation

Why Latin America suffered chronic high inflation and hyperinflation for decades, and how independent central banks and inflation targets brought it down.

For much of the late twentieth century, Latin America was famous for high inflation. Several countries experienced hyperinflation, where prices rise at extreme rates, including Bolivia in the mid-1980s, and Argentina, Brazil, Peru and Nicaragua around 1990.

Why inflation was so high

Deficits financed by printing money: governments spent more than they collected and covered the gap by having central banks create money.
Indexation: wages, rents and contracts were automatically adjusted to past inflation, so inflation carried forward from one period to the next, making it hard to stop.
Debt crises: after the 1980s debt crisis, countries lost access to foreign loans, increasing pressure to print money.
Weak central banks, controlled by governments that wanted money for spending.

Bolivia’s hyperinflation

In 1985, Bolivia’s annual inflation rate reached over 20,000 percent by some measures. A stabilisation programme that year, with sharp spending cuts, a unified exchange rate and an end to money-financed deficits, stopped hyperinflation within weeks. The economist Jeffrey Sachs advised the government.

How inflation was tamed

By the 2000s, inflation had fallen dramatically across most of the region. Key changes included:

Fiscal discipline, reducing deficits financed by money creation.
Central bank independence, giving central banks legal protection from political pressure.
Inflation targeting: Chile, Brazil, Mexico, Colombia and Peru adopted explicit inflation targets around the late 1990s and early 2000s.
Ending indexation in many contracts.

How indexation keeps inflation going

Suppose inflation was 50 percent last year. Workers' contracts automatically raise wages by 50 percent. Businesses, facing higher wage costs, raise prices by 50 percent. Inflation this year is again 50 percent, even if nothing else is pushing prices up. Breaking this cycle requires coordinating a stop, which was the idea behind Brazil's Real Plan.

Exceptions

Not every country has escaped. Venezuela experienced hyperinflation in the late 2010s, and Argentina has suffered repeated high inflation. Both show what happens when large deficits are financed by money creation and central banks lack independence.

Thinking inflation is only about too much money

Printing money to finance deficits was a key cause, but indexation, expectations and political pressure made inflation persistent. Successful stabilisations addressed all of these, not only the money supply.

Key takeaways

Latin America suffered chronic high inflation and several hyperinflations in the late twentieth century.
Money-financed deficits, indexation, debt crises and weak central banks were key causes.
Bolivia stopped hyperinflation in 1985 with a sharp stabilisation programme.
Fiscal discipline, independent central banks and inflation targets brought inflation down in most countries.