The two sides of inflation in Peru: Dynamics and monetary policy transmission

When emerging-market inflation falls to advanced-economy levels, has anything fundamental changed in how firms set prices—or is the calm headline masking the same volatile forces underneath? Identical inflation rates can conceal very different pricing structures, yet aggregate measures cannot tell them apart. We address this question for Peru — a commodity-dependent small open economy that went from hyperinflation to advanced-economy price stability — by decomposing inflation into the upward and downward pricing pressures that net out to the headline rate. To do so, we extend the Quineche and Zapata (2026) decomposition to the fragmented CPI databases typical of emerging markets, applying it to 1996–2024 using up to 188 sub-indices across four base-year periods. The 2002 adoption of inflation targeting coincides with a turning point: both pressures fall by roughly half, their volatility compresses, and their asymmetry stabilizes—a change in pricing behavior, not just in the aggregate outcome. We then use TVP-VAR-SV models to show that contractionary monetary policy transmits asymmetrically, operating mainly through a persistent rise in deflationary pressure. Both pressures rise on impact, but inflationary pressure rises by more, producing the familiar short-run price puzzle before disinflation sets in. This transmission has itself evolved under inflation targeting: the short-run price increase weakens, while the restraint of price increases strengthens.