Anchored Inflation Expectations Help Latin America Weather the Oil Shock
IMF Blog, May 26, 2026
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Bibliographic details
- Authors: Philip-Barrett, Gonzalo Huertas
- Published: May 26, 2026
Overview
- As the conflict in the Middle East raises oil prices and threatens another round of inflation, Latin America’s well-anchored inflation expectations are poised to help cushion the impact—even as some major central banks have looked to cut interest rates.
- For most countries in the region, post‑pandemic supply shocks have not raised long‑term inflation expectations—even amid higher near‑term inflation.
- The paper shows that well‑anchored expectations limit the transmission of energy and other commodity price shocks to consumer prices because higher import prices today are not expected to translate into persistently higher inflation tomorrow.
- The analysis builds on earlier IMF work showing stronger anchoring significantly reduces the inflationary impact of terms‑of‑trade shocks in emerging markets.
Evidence on anchoring and trends
- Latin America’s major economies now benefit from better‑anchored inflation expectations, the result of institutional reforms begun about 25 years ago.
- Reforms included adopting inflation targeting, strengthening central bank independence, and ending fiscal dominance.
- Though inflation forecasts in Latin America remain, on average, further from target than in advanced economies, the dispersion in views is similar across both country groups—consistent with policymakers seen as credible and operating within institutional constraints.
- Over the past two decades, both tails of the distribution of inflation expectations—views that price increases would be too high or low—have improved. People who once expected inflation to be too high, as well as those who expected it to be too low, have gradually shifted their views toward central banks’ targets.
Key mechanisms and empirical findings
- Well‑anchored expectations reduce pass‑through from import and energy price shocks to consumer prices.
- Tighter‑than‑expected monetary policy can help deliver modest advances in beliefs, increasing anchoring moderately and with a delay.
- Unexpectedly loose monetary policy can have much stronger negative effects, leading to expectations losing their anchor.
- Stable expectations allow policymakers to better manage trade‑offs in the face of oil price shocks.
Country case studies and lessons for regime design
- Case studies from Brazil, Chile, and Argentina illustrate how changes to monetary policy frameworks affect expectations and offer lessons for policy design:
- The appropriate monetary regime depends on context. Although inflation targeting is often a key component of policy regimes that deliver macroeconomic stability, it may not always be ideal when inflation is very high.
- If inflation is very high, simpler regimes—such as those with exchange rate or monetary targeting components—may initially be more appropriate.
- Inflation targeting can still help anchor expectations when adopted rapidly in a challenging economic environment; the introduction of inflation targeting in Brazil in 1999 is one such case.
- In challenging conditions, transparency and accountability are critical to build confidence in the central bank’s policy objectives.
- Broad institutional support is essential. Inflation targeting regimes are unlikely to succeed when fiscal or other policies undermine the central bank’s stated objective, or if broader political commitment to low and stable inflation is lacking.
- High levels of dollarization can add to disinflation challenges.
Risks, vulnerabilities, and policy implications
- Hard‑earned credibility is easy to lose: inappropriately loose policy or abrupt changes to frameworks can quickly erode gains in anchoring.
- Preserving credibility is central to sustaining stability when shocks—such as the largest disruption in the global oil market’s history—test economies.
- Policy implications:
- Maintain monetary credibility through consistent and transparent policy action.
- Avoid unexpectedly loose monetary policy that could unanchor expectations.
- Ensure fiscal and broader policies support the central bank’s objectives.
- Consider regime design appropriate to the inflation context, including temporary use of alternative frameworks when inflation is very high.
Conclusion
- More‑anchored inflation expectations, resulting from reforms a generation ago, help Latin American economies better absorb temporary price pressures from oil and other commodity shocks.
- This ability to weather turbulence comes from monetary credibility built over decades, but it is not guaranteed; preserving credibility requires careful policy design and institutional support.
—This blog draws on the departmental paper “Anchoring Inflation Expectations: Evidence from Latin America during the Post-COVID Stress Test” by Philip Barrett, Federico Duenas, Christopher Evans, Eric Huang, Gonzalo Huertas, and Tannous Kass-Hanna.