Most, but not all, emerging markets have overcome high inflation

marked a quarter of a century since Brazil beat hyperinflation with a conjuring trick. The old currency, the cruzeiro, had been debased, suffering annual price rises reaching 2,500%. Following the advice of a small group of economists, the government required firms to list prices and wages in “units of real value”, a new unit of account linked loosely to the dollar.

This variation is one reason why there is not much head-scratching about low inflation in emerging markets. Another is that fewer central banks than in the rich world—a little more than half of the total—are undershooting their targets. And monetary policymakers are not pressed up against the lower bound on interest rates, at which low inflation becomes a greater threat. But this poses its own problem.

That casts some doubt on the simple story that inflation targeting in emerging markets has been a triumph for conventional economics. What is more, it is uncertain how secure emerging markets’ low inflation is. Three factors threaten it: the strength of institutions, fiscal policy and the global environment.

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Source: CNBC - 🏆 12. / 72 Read more »