Argentina and Sri Lanka Have Inflation Above 50 Percent — U.S. Eyes Double Digits

Mohit Oberoi, CFA - Author
By

Jul. 15 2022, Published 9:58 a.m. ET

Annualized inflation in the U.S. increased 9.1 percent in June, which was the highest in decades and worse than what analysts were expecting. While a 9.1 percent inflation is hurting ordinary Americans, countries like Turkey, Argentina, and Sri Lanka are battling inflation above 50 percent. Why is inflation so high in these countries and could the U.S. also head towards double-digit inflation?

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While it doesn't bring any solace, inflation has been rising across the world. Higher prices of oil, commodities, and food products are putting upward pressure on inflation in all countries. Most major economies except for China and Japan have high single-digit inflation.

Argentina’s inflation is expected to rise to 90 percent in 2022.

Argentina has been an example of how not to manage a country’s fiscal position. The country has defaulted on its debt multiple times in the past and the most recent default was in 2020. It managed to fend off a default in 2022, thanks to an IMF bailout.

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The country has been printing money, which is adding to inflation. Even in the U.S., massive money printing added to inflation even as the scale of money printing in Argentina eclipses what we’ve seen in the developed world. Excessive money printing has also led to a devaluation of the Argentinian peso, which is also adding to the inflationary pressures.

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After the exit of Argentina’s Economy Minister Martin Guzman, analysts have upwardly revised the country’s inflation rate forecast to 90 percent. It had an annual inflation rate of 64 percent in June. While the country has gotten used to spiraling prices, the June inflation was the highest in three decades. In 2022, Argentina’s inflation would only be better than Sudan's and Venezuela's, if analysts' estimates are correct.

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Sri Lanka’s inflation hit 54.6 percent in June.

Sri Lanka’s inflation rose at an annualized pace of 54.6 percent in June, which was a record for the island nation. The country’s central bank expects inflation to rise 70 percent amid the turmoil. Along with the global factors, self-inflicted wounds are also leading to inflation in Sri Lanka. The country’s former President Gotabaya Rajapaksa, who has now fled the country, took a series of missteps that led to the first debt default for the country.

He banned chemical fertilizers and forced the country’s farmers to shift to organic farming. As expected, the farm yields dropped and the timing couldn't have been worse. A global shortage of some food products and dwindling foreign reserves meant that Sri Lanka finds it tough to pay for imports.

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Tourism was the mainstay of Sri Lanka’s economy and the sector's earnings have taken a hit due to the COVID-19 pandemic as well as a series of attacks in the country. There's a widespread shortage of food, fuel, and medicines in the country, which is putting upwards pressure on prices.

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Will U.S. inflation hit double digits?

The last time U.S. inflation hit double digits was in 1981. Most Americans aren't used to such high inflation. Even the Federal Reserve is worried that inflation could get entrenched. The inflation reading has now surpassed estimates for two more months leading to fears that national inflation is now headed towards double digits. Some cities in the U.S. are already battling double-digit inflation.

The next Fed meeting is on July 26–27.

The Fed is increasing rates to tame inflation and raised its policy rates by 75 basis points in June, which was the steepest hike since 1994. After the June inflation reading and Canada’s 100 basis point rate hike, many economists now see Fed Chair Jerome Powell raising rates by 100 basis points at the next Fed meeting on July 26–27.

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