Juan Luis Guerra said that “the cost of living is rising again, and the peso’s decline is barely noticeable,” referring to the high inflation rates the Dominican Republic faced in the late 1980s and early 1990s, which averaged nearly 50% annually between 1988 and 1991. Although the sources of inflation can vary, in Latin America they are generally related to monetary imbalances, high levels of fiscal spending, and/or significant devaluations.

The situation in Chile at that time was not very different. However, the transition to democracy, the establishment of an independent central bank, and—above all—broad political agreements among the ruling party, the opposition, and the labor unions made it possible to achieve the goal of reducing inflation in an orderly, credible, and sustainable manner. Today, 30 years later, the country enjoys a level of price stability that any of our neighbors—and even several OECD countries—would envy. 

Most recently, after several higher-than-expected readings, the CPI showed a change of just 0.2% in February compared to January. This surprised the market, which had expected twice that amount and had been somewhat spooked by January’s 0.7% (as Juan Luis Guerra would have said in the ’90s about a 0.7% change, “I’d jump for joy!”). Although our economy still has several indexation mechanisms in place, its evolution has meant that higher past inflation does not necessarily imply higher inflation in the future. In other words, it could happen, but the causes would be different. 

To think that Chile would face high inflationary pressures in 2021 is to look at only part of the picture. It’s true that some local supply shortages, increases in food and fuel prices, and certain rate adjustments could drive up prices in the short term, but from a longer-term perspective, we mustn’t forget that the economy is only just showing tentative signs of recovery and that some markets—such as the labor market—remain weak and will take longer to return to normal.

That said, due to base effects, year-over-year inflation could rise by midyear and exceed 4.0%. But there’s no need to worry, since once we enter the second half of the year, we should see a gradual normalization that brings us back to the 3.0% target. That target would have been a dream come true for Juan Luis back in the ’90s.