Inflation in the region1—which rose to over 8 percent in August 2008—is expected to remain high through end-2008, before beginning to decline gradually in 2009. For Latin America and the Caribbean, this surge in inflation is the first real on the region’s commitment to low inflation. To asses the challenges of keeping inflation under control, a recent study by IMF staff analyzes two related questions: (1) what are the main determinates of the inflation surge? and (2) how monetary policy has responded so far?.
The world economy continues to be buffeted by the burgeoning downdraft of the financial crisis and volatile commodity prices. As such, the outlook points to a major downturn for the global economy, with growth falling to its slowest pace since the 2001–02 recession. However, authorities around the world have taken further, massive, and increasingly coordinated corrective actions. The central scenario in the IMF’s recently World Economic Outlook (http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm) anticipates that these will be successful in stabilizing financial conditions. However, it will take time, under any rescue plan, to restore the proper functioning of credit markets. For the United States, our baseline projection is that recovery will begin in the second half of 2009, and will be more gradual than previous recoveries, because of the exceptional nature of the asset price adjustments taking place. Overall, growth in the advanced economies as a whole will also be close to zero at least until the middle of 2009.