Accessible Version
How Well-Anchored are Long-term Inflation Expectations in Latin America? Accessible Data
Figure 1. Inflation in 5 Latin American Countries, 1960-2024
This is a panel of five line charts titled Inflation in 5 Latin American Countries, 1960-2024, one for each Latin American country that we study. The countries are Brazil, Chile, Colombia, Mexico, and Peru, sometimes referred to as the Latin 5 in this note. In each chart, the x axis ranges from -10 percent to 50 percent and the y axis ranges from 1960 to 2024, with 2024 through the first quarter. The graphs are truncated at 50 for readability. Each chart plots the evolution of inflation between 1960 and 2024. Annual inflation is expressed as Q4-over-Q4 inflation. We use monthly data to obtain Q4-over-Q4 inflation, except for Mexico, where inflation before 1970 is based on annual data on the CPI for Mexico City, as monthly data were not available.
The gray vertical lines denote when central banks became legally more independent under reforms to the constitution in Chile in 1989, Colombia in 1992, Mexico in 1993, and Peru in 1993. Brazil’s central bank independence law was passed in February 2021. The dashed vertical orange lines denote the year that inflation targeting frameworks were introduced: Brazil, Chile, and Colombia in 1999, Mexico in 2001, and Peru in 2002.
Figure 1 shows that inflation was high and variable until the 1990s, when inflation begins to fall to single digit levels. Inflation rates dropped before inflation targeting frameworks were introduced.
Notes: Figure 1 displays the annual inflation rate, expressed as the Q4 over Q4 percent change in the CPI, computed from monthly data. Inflation rates above 50 percent are omitted for readability. Data for 2024 is 4-quarter inflation through the first quarter. For Mexico, inflation 1960-1969 is based on annual data. The vertical solid gray and dashed orange lines denote when the central bank became legally more independent and when the inflation targeting framework was announced.
Sources: Inflation data obtained from websites of the central Banks of Brazil, Chile, Colombia, Mexico, and Peru, and Haver Analytics. Details are in Appendix 1.
Figure 2. Headline Inflation and Long-term Inflation Forecasts 2000-2024
This is a panel of five line charts titled Headline Inflation and Long-term Inflation Forecasts 2000-2024, one for each Latin American country that we study (Brazil, Chile, Colombia, Mexico, and Peru). For each chart, the x axis ranges from -4 percent to 18 percent and the y axis ranges from January 2000 to March 2024. In each chart, 12-month headline inflation (orange line) is compared to the inflation target (red line) and to the cross-sectional average in professional forecasters’ 6 to 10 year ahead inflation forecast from Consensus Economics (blue ball and chain). For Mexico, the green dashed line displays the cross-sectional average forecast for inflation 5 to 8 years ahead from the Bank of Mexico’s monthly survey of professional forecasters. The inflation data are monthly. The Consensus Economics forecasts are bi-annual through 2013 (April and October) and quarterly thereafter (with surveys in January, April, July, and October). The Bank of Mexico survey data are monthly.
The charts show that Chile and Mexico stabilized their inflation targets at 3 percent in the early 2000s. Peru reduced its inflation target from 2.5 to 2.0 percent in early 2007. Brazil by contrast, took longer to stabilize its inflation target, and the figure shows that the inflation target was changed several times. Between 2017 and 2021, the target was reduced, gradually, from 4. 5 percent to 3 percent. Shown is the longest-term inflation target at the time. A June 2024 reform formalized that 3 percent as the stable inflation target. The inflation target for Colombia is the 3 percent long-term inflation goal set by the central bank in late 2001. Colombia’s central bank continued to set medium-term inflation targets until 2009, as is detailed in the text, but for our purposes, the long-term target is the relevant inflation goal.
Figure 2 indicates that despite wide variations in inflation, the cross-sectional average long-term inflation forecast has moved relatively little, even amid the post-pandemic inflationary surge. For Chile, the cross-sectional average long-run inflation forecast from the Consensus Economics survey has been anchored at the 3 percent target since the early 2000s. For Colombia, the long-term forecast moved to close to the 3 percent long-term inflation target after 2012, as it took time for forecasters to be more convinced that the central bank would pursue the 3 percent goal. For Peru, the long-term inflation forecast settled to close to the 2 percent target after 2015. For Mexico, the cross-sectional average forecast for inflation over the long-term from both the Consensus Economics and Bank of Mexico surveys have been persistently above 1/2 percentage point above the inflation target. For Brazil, the cross-sectional average long-run inflation forecast has been more variable.
Notes: In each chart, the gold line displays 4-quarter headline inflation between Q1 2000 and Q1 2024. Headline inflation is compared to the inflation target and to the cross-sectional average in professional forecasters’ 6 to 10 year ahead inflation forecast from Consensus Economics (blue ball and chain). For Mexico, the green dashed line displays the cross-sectional average forecast for inflation 5 to 8 years ahead from the Bank of Mexico’s monthly survey of professional forecasters. The inflation target for Colombia is the 3 percent “long-term” inflation goal announced by the central bank in late 2001, as is detailed in the text. For Brazil, the inflation target shown is the longest-term inflation target in effect at the time.
Sources: Consensus Economics, Central Bank of Brazil, Bank of Mexico, and Haver Analytics.
Figure 3. Dispersion in Long-Run Inflation Expectations 2005-2024
This is a panel of four line figures. In each figure, the x axis ranges from zero to 1.0 percent; values above 1.0 percent for Mexico are truncated for readability. The y axis ranges in each panel is from 2005Q1, when the Consensus Economics data first become available, to Q1 2024 (representing the April 2024 surveys). Thee first three plot the standard deviation of long-term inflation forecasts from Consensus Economics. Brazil and Peru are plotted in the upper left panel, Chile and Colombia are plotted in the upper right panel, while Mexico is plotted in the lower left panel. The lower right panel displays two measures of dispersion in long-run inflation forecasts (5 to 8 years ahead) from the Bank of Mexico’s monthly survey of professional forecasters, the cross-sectional standard deviation in long-term forecasts and the interquartile range. The panels on Mexico are truncated at 1.0 for readability, as the degree of dispersion in long-term inflation forecasts spiked to about or above 2 percent for Mexico in 2017-2018 and in 2019, as is described in the text.
The data are quarterly for the Consensus Economics data (bi-annual before 2014, April and in October) and monthly for the Bank of Mexico survey.
Figure 3 shows that the degree of dispersion in long-term inflation forecasts for Brazil has been much greater than that of other countries, providing further evidence that long-term inflation expectations for Brazil are more weakly anchored than for the other countries. The degree of dispersion in long-term inflation forecasts declined for Colombia after 2013, consistent with the notion that forecasters tended to agree to a greater extent that the central bank would pursue a stable 3 percent inflation goal. Measures of dispersion in long-term inflation forecasts for Mexico spiked in 2017-18 and in 2019, possibly reflecting concerns that the commitment to fiscal and monetary discipline might wane under the incoming left-wing government, which was elected July 2018 and took office the following December. Amid the rise in inflation in recent years, the degree of dispersion in long-term forecasts has moved up for both Chile and Colombia.
Notes: Shown in the first three charts is the cross-sectional standard deviation of long-term inflation forecasts from Consensus Forecasts. The data first become available in 2005. For Mexico, displayed in the fourth panel are two measures of dispersion in long-run inflation forecasts (5 to 8 years ahead) from the Bank of Mexico’s monthly survey of professional forecasters, the cross-sectional standard deviation in long-term forecasts (teal line) and the interquartile range (dashed orange line). These data first become available in 2008.
Sources: Consensus Economics, Bank of Mexico.
Figure 4. Far-Forward Inflation Compensation
In Figure 4, the x axis ranges from zero to 10 percent and the y axis ranges from January 1, 2005 (in July 2026 for Brazil) to April 30, 2014. Figure 4 has two panels that depict the evolution of far forward inflation compensation, that is, 5-year forward rate for inflation compensation ending in 10 years, based on daily financial market data. The top panel displays far forward inflation compensation in Chile and Mexico and the bottom panel displays far forward inflation compensation in Brazil and Colombia.
Shown is the 5-year forward rate for inflation compensation ending in 10 years, beginning whenever there were sufficient data to construct zero coupon yield curves to April 30, 2024. The series are volatile, but generally, far forward inflation compensation has been higher in Brazil and Colombia than in Chile, with Mexico an intermediate case. Inflation compensation rose around 2022, when inflation rose to its highest level since the 1990s (since 2003 for Brazil) but has since then declined.
Notes: Shown is the 5-year forward rate for inflation compensation ending in 10 years, beginning whenever there were sufficient data to construct zero coupon yield curves to April 30, 2024.
Sources: Constructed by the authors, except for Chile, where inflation compensation is from the Central Bank of Chile’s website. For Colombia, the Banco de la República posts daily data on zero coupon yields on nominal and inflation indexed data. We used these data, which we accessed via Haver Analytics, to construct far forward inflation compensation. For Brazil and Mexico, far forward inflation compensation was obtained from the data used by DePooter, Robitaille, Walker, and Zninek (2014) through 2011. Forward yields after that were constructed by the authors using bond yields data from Bloomberg for the period January 1, 2012 to April 30, 2024.
Figure 5. Inflation Risk Premia
In Figure 5, the x axis ranges from -1 percent to 5 percent and the y axis ranges from the first quarter of 2005 to the first quarter of 2024. Figure 5 displays the evolution of our estimate of the inflation risk premium for Brazil, Chile, Colombia, and Peru, which we construct by subtracting from far forward inflation compensation (5-year inflation compensation ending in 10 years) the average long-term inflation forecast (6 to 10 years ahead) from the Consensus Forecast. Far forward inflation compensation was averaged over the same quarter as the Consensus Forecast survey as is described in the text. Observations prior to 2014 are bi-annual and quarterly thereafter.
Figure 5 shows that the inflation risk premium has been relatively high in Brazil over the entire period. Amid the inflation surge post-COVID19 pandemic, inflation risk premiums moved up for all four countries and have more recently been declining, but remain relatively high for Brazil and Colombia at about 2 to 3 percent.
Notes: Shown is the evolution of our estimate of the inflation risk premium, which we construct by subtracting from far forward inflation compensation (5-year inflation compensation ending in 10 years) the average long-term inflation forecast (6 to 10 years ahead) from the Consensus Forecast. Far forward inflation compensation was averaged over the same quarter as the Consensus Forecast survey as is described in the text. Observations prior to 2014 are bi-annual and quarterly thereafter.
Sources: As described in Figures 2 and 4.