Caribbean & Central America - September 2023

Costa Rica accumulated deflation of -1.70% in the first seven months of the year, the lowest figure in the last decade, the national statistics institute (Inec) reported on 8 August.

The country posted deflation of -0.19% in July, and the annualised figure was -2.29%, providing a stark contrast with much of the rest of the world which is battling high inflation. The consumer price index (IPC) contains 289 items, of which 39% saw price falls, 17% remained stable, and 44% saw price increases. Items which saw the largest falls include international package trips, petrol, and airline tickets, while those that saw the largest increases include mobile telephony, electricity, and toilet paper.

In its latest report on monetary policy, published 30 July, the central bank said that deflation was due in part to the fall in external inflationary pressures, as well as its restrictive monetary policy and the appreciation of the colón compared to last year. Economist Gerardo Corrales, a professor at Costa Rica’s INCAE Business School, said that this divide has deepened inequality in the country. Those products which have seen price decreases are largely purchased by wealthy consumers, whereas everyday items bought by everyone have increased in price. For example, the price of the basic basket of goods (canasta básica) has increased 8% year-on-year, Corrales told Costa Rican media outlet Columbia in an article published on 3 August.

In the same article, former president of the central bank Rodrigo Cubero (2018-2022) said that the conditions which have caused deflation in recent months do not look set to persist, and therefore should not be cause for concern.

Some have criticised the central bank for an overly restrictive monetary policy given that inflation is well below the target range. For example, the bank recently decreased its base rate by 50 points to 7% from 15 June, a move which was criticised by the country’s chamber of industry (CICR) and national tourism chamber (Canatur). They argued that inflation was already lower than the target range in May, and so the central bank could have cut rates to a greater extent.

Sergio Capón Brenes, president of the board of directors of the CICR, said that high interest rates and a strong colón are affecting manufacturing, as well as thousands of families that hold debt in the local currency. The policy is putting jobs at risk, as well as social stability, he added. Rubén Acón Toy, president of Canatur, said that the bank is “sacrificing production and investment when the country needs economic growth and job creation”.

For its part the bank said that although inflation had fallen faster than predicted, its board still believed that the risk of inflation is increasing in the medium term. Then, at the end of July, the bank revealed that its forecast says that inflation will return to the target range of 2%-4% by the third quarter of 2024.

While it is facing criticism at home, the bank’s strategy appears to have the backing of the International Monetary Fund (IMF). “While there is scope for further monetary easing in 2023, policies should remain attentive to risks to the inflation outlook,” said the organisation in a statement published in June. These risks include “weaker-than-expected external demand, tighter global financial conditions, and commodity price volatility,” as well as the country’s exposure to natural disasters, according to the IMF.