Sectoral shocks

The pandemic has triggered significant price movements in some sectors, essentially food, transport, clothing and communications. One striking aspect is that price dispersion or variability across sectors has so far remained relatively small by recent historical standards, especially compared to the global financial crisis.

This is due to relatively small and transitory post-pandemic fluctuations in fuel, food and housing prices, which are the three most important components of consumer baskets, in general.

In their latest IMF World Economic Outlook (WEO), they forecast that inflation will continue to rise in the coming months and then return to pre-pandemic levels by mid-2022, although risks of acceleration remain.

Inflation dynamics and demand recovery

Inflation as measured by the general consumer price index has evolved in line with unemployment. While the pandemic period presents many difficulties in estimating this relationship, the unprecedented shock does not appear to have significantly altered this relationship.

Advanced economies are likely to face inflationary pressures in the short term and their impact is likely to moderate over time. In emerging markets, on the other hand, estimates of the relationship between idle capacity, the amount of an economy's resources that are not being used, and inflation appear to be more sensitive to the inclusion of the pandemic period in the estimation sample.

Anchoring Expectations

Inflation during the pandemic has remained anchored, as judged by measures of long-term expectations, known as break-even inflation rates obtained from government bonds of 14 nations.

In addition, in a study conducted by Fundación Salvadoreña para el Desarrollo Económico y Social (FUSADES), indicates that inflation in El Salvador as of August 2021 rose to 4.3%, the highest rate since April 2012.

The economy has been recovering internally, but its level is yet to return to 2019, this indicates that domestic demand is still weak, therefore, inflationary pressures are moderate.

The sources of the acceleration in prices are of an imported nature, through the prices of raw materials (fuels, food, metals, etc.) and final consumer goods; and also, there may be a speculation effect, explained by the impact caused by the increase in the minimum wage that came into effect in august.

Regarding the imported component, it can be observed in graph 11, the cyclical coincidence of El Salvador's inflation compared to that of the United States; while in the latter country prices in general increased by 5.3% in august 2021, El Salvador follows. This value reflects the result of external and internal factors.

El Salvador, being a dollarized economy, tends to behave similarly to the United States, where inflation reached 5.3%. In august 2021, all groups of the Índice de Precios al Consumidor (IPC) observed an increase in prices, from electricity, gas and others with 10.1% and communications 0.1%. The food and non-alcoholic beverages group, with the highest weight within the basket, showed an increase in august.