Inflation dynamics as a response to commodity prices, inflation expectations and exchange rate depreciation.

Recent domestic and global shocks, especially the extraordinary increase in international food and energy prices, as well as the persistent depreciation of the local currency, explain the unusual surge in inflation during post COVID-19 recovery. This study seeks to quantify these factors’ contribution to multiple inflation metrics using a Bayesian approach that is robust to the features of a small open economy such as Peru. Structural shocks are identified using a scheme of contemporaneous zero-sign constraints. The results confirm the significant contribution of food and energy price increases together with exchange rate depreciation to the recent inflationary episode. This may be associated with the impact of these prices on domestic production costs by increasing the cost of different imported inputs. Finally, a counterfactual exercise shows that, had pre-COVID-19 commodity price forecasts materialized, domestic inflation metrics would not have exceeded the inflation target range.