Official data on Monday revealed that Peru concluded 2023 with an annual inflation rate of 3.24 percent, the lowest in three years, offering a small relief for the country amidst an ongoing economic recession.
The central bank initially estimated 2023's inflation to close at 3.8 percent. However, the forecast was adjusted to 3.1 percent last month due to several optimistic inflationary indicators, indicating a faster-than-expected recovery.
This figure marks the smallest increase since 2020, when prices rose 1.97 percent throughout the year, and is among the lowest in Latin America.
The most recent data places Peru's inflation close to the central bank's target range of 1.0 percent to 3.0 percent, a milestone forecasted to be reached not until the first quarter of 2024.
According to data from national statistics agency INEI, the price index, centered on Lima's metropolitan region, indicated a 3.24 percent annual rise, slightly exceeding the anticipated 3.20 percent surge predicted by a Bloomberg survey of economists. It also increased by 0.41 percent on a month-to-month basis in December.
The slowdown in inflation, although modest compared to Peru's 8.66 percent rise in January 2023, signifies a pivotal moment in the country's economic trajectory. It demonstrates Peru's effort to better align with the economic goals set by the central bank.
INEI's statement highlighted that the December inflation was primarily driven by price hikes in restaurants and hotels (6.64 percent), education (6.40 percent), along with food and non-alcoholic beverages (3.74 percent).
Despite these positive signs, Peru is not without its share of economic challenges. The potential impact of the El Nino weather phenomenon, reduced private investment in sectors such as mining, and the possibility of further anti-government protests are all factors that could impact the country’s economy.
Predictions for 2024
Last Thursday, Peru's Economy Minister, Alex Contreras, echoed the central bank's projections, anticipating a 0.5 percent contraction in the country's economy this year, followed by growth in 2024.
Contreras attributed the economic decline to setbacks in agro-exports and the fishing industry caused by the climate phenomenon, El Nino, and early-year protests.
"2023 has been atypical for the Peruvian economy, specifically in terms of prices," Contreras said on Friday.
"However, it has been possible to stabilize inflation, which in January was almost 9.0 percent, but now it closes December at 3.0 percent."
If this trend persists, Contreras forecasted on Friday that inflation will close 2024 at 2.0 percent.
After poised for its worst performance since 1998, excluding pandemic effects, the central bank forecasted the economy to rebound.
A recovery in private investment, fueled by infrastructure contracts and mining projects, is expected to drive this turnaround. This will be achieved through the execution of the United Plan (Plan Unidos).
The minister also anticipates stability for the Peruvian Sol throughout 2024. He believes the anticipated interest rate reduction in the U.S. is expected to bolster the Peruvian Sol's resilience. On top of that, he noted the central bank can manage exchange rate fluctuations.
These optimistic predictions are bolstered by the statement from the president of Peru, Dina Boluarte. She announced on Monday in a televised message that Peru's government will focus on boosting the economy and fighting organized crime in 2024.
In 2024, the administration's challenge involves ensuring that all confidence indicators fall within the optimistic range. It succeeded in achieving this with the six- and 12-month indicators, but the persistent issue lies in the short-term indicators, particularly the three-month expectations.
These two indicators have sustained pessimism for four consecutive years, with the central bank also warning that an intensified El Nino might complicate inflation control efforts.