Inflation Dynamics in Latin America and the Caribbean

We perform a principal component analysis of the inflation dynamics in Latin America and the Caribbean to assess the recent surge in inflation across the region. The principal component accounts for 57% of the variation in inflation in the last 17 years, and it is highly correlated to the principal components of inflation of country groups outside the region, especially post-COVID-19. Global factors such as US inflation, commodity prices, and international shipping costs can account for at least one-third of the variation of the principal component. The analysis implies that external factors are major drivers of the surge in inflation in the region post-COVID-19 lockdowns.