QCOSTARICA — The ongoing issue of deflation in Costa Rica is primarily caused by a cheap dollar and elevated interest rates, explains financial analyst Daniel Suchar.
This situation is concerning because it ultimately leads to minimal salary adjustments over time.
How is this perceived in the economy?
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According to Suchar, when a country registers continuous levels of deflation it is never a positive indicator, since the consumer price index is like a thermometer that is used to set salary increases and this means that many people are being sentenced to have the same income.
“The indicator is not sustainable over time. There must be economic and monetary policies more aligned with the inflation objective. At the moment we have a monetary policy with very high interest rates and the main reason for deflation is the fall in the exchange rate that makes many imported goods cheaper,” said the financial analyst.
Why is it that people do not recognize the impact of deflation in their pockets?
First, not all the products measured by the index are consumed by all social strata and many of those that have been falling in price are rarely purchased by people with lower purchasing power, a very clear example are airline tickets and new vehicles.
LatinNews Daily reported in January 2024, “Costa Rica’s national statistics institute (Inec) has released new figures which show the country posted annual deflation of -1.77% in December 2023 – the highest deflation of the last ten years.
“This follows 7.88% annual inflation in December 2022, 3.30% in December 2021, and 0.89% in December 2020. In monthly terms, inflation in December was 0.01%, up from -0.23% registered in November (when the annual rate was -1.64%) but up from October (0.21%) when the annual rate was -1.28%.”
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Why do prices feel too high? Shouldn’t prices start falling?
Perhaps the increase in prices is not as rapid as previously, but the average prices are still significantly higher than pre-pandemic levels. And the majority of them are continuing to increase.
According to economists, it would be beneficial if prices decreased. Returning to the period before the economy rapidly recovered from the pandemic recession and prices surged may seem appealing. However, some economists warn that a widespread decrease in prices would indicate an unhealthy economy.
Careful what you wish for, economists say.
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