“This time, because the uncertainty about the COVID crisis was so great, and the shock was so large, EM central banks acted in a way that was much more similar to developed market central banks,” he says.
EM and developed market central banks began to diverge in the second half of 2021. While the Federal Reserve and other central banks in the developed world believed inflation would be transitory, a lot of EM central bankers realized they had to take off the stimulus from their monetary policies to ensure inflation didn’t get out of hand.
Today, inflation has devolved into a global phenomenon. The magnitude of stimulus unleashed by the Fed and other policymakers across developed markets has reverberated across economies, leading to increased correlations in CPI rates across the planet even though EM central banks got a head start in adopting contractionary monetary policy positions.
“I think central bankers in emerging markets have been through a lot of cycles of high inflation throughout their careers. Most of them have seen CPI prints that are this high, and even higher, so they were more mindful of inflation spiraling out of control,” de Sousa says. “But if you look at the careers of people at the Fed or the European Central Bank, for example, it’s very different. In the developed world, inflation hasn’t been this high in about 40 years, and it’s been particularly low over the past decade. So central bankers in developed countries have tended to be more complacent.”
Some members of the emerging market world have captured headlines with devastatingly high rates of inflation. Sri Lanka has seen headline inflation soar above 50%; Argentina’s CPI is just north of 70%, while ordinary Turkish citizens are struggling under the crushing financial weight of near-80% inflation.
