Panama and Costa Rica are reporting falling consumer prices while most of Latin America battles persistent inflation. Official data from September 2025 shows Costa Rica’s Consumer Price Index fell 1.0 percent year-over-year, with Panama recording a 0.4 percent decline during the same period. This deflationary trend, analyzed in a recent Bloomberg report, may signal weakening domestic demand in both nations rather than improving consumer welfare.
The negative price variations present a complex economic puzzle for Central America’s two standout economies. While lower prices typically benefit consumers, economists warn the current deflation in Panama appears closely linked to rising unemployment. The country is projected to finish 2025 with its highest jobless rate in two decades, potentially exceeding 10 percent by October’s end.
“Although falling prices might seem advantageous at first glance, in contexts like Costa Rica and Panama this can be more a signal of weak economic activity than improved welfare,” said Jonathan Fortun, an economist with the Institute of International Finance. [Translated from Spanish]
Fortun emphasized the risk that this dynamic could erode forward-looking inflation expectations. The situation creates particular concern for policymakers who typically focus on controlling price increases rather than preventing declines.
Divergent Drivers Behind Price Declines
Costa Rica’s deflation stems partly from specific reductions in fuel and food costs. Beneath these sector-specific adjustments lies what economists interpret as a broader demand slowdown. Panama’s more moderate price decreases similarly reflect weakened domestic spending power rather than any fundamental improvement in consumer conditions.
Panamanian economist and banker Carlos Araúz directly connects his country’s deflation to employment deterioration. He projects wage stagnation and reduced compensation levels will accompany the rising unemployment. “This scenario tends to stagnate salaries and reduce remuneration levels,” Araúz stated. [Translated from Spanish] The situation marks a dramatic shift for Panama, which maintained relatively strong job numbers throughout most of the past twenty years.
The broader regional context makes these deflationary patterns particularly noteworthy. Most neighboring countries continue struggling with elevated inflation rates, making Panama and Costa Rica outliers in Central American economic performance. This divergence suggests unique domestic factors are overpowering regional inflationary pressures.
Export Sector Shows Resilience Despite Domestic Challenges
Panama’s trade sector demonstrates surprising strength despite domestic demand concerns. The Ministry of Commerce and Industries reported accumulated exports reached $754.9 million between January and September 2025. This represents a $34.2 million increase compared to the same period in 2024, confirming a positive trend maintained throughout the year.
“The results confirm that our exports maintain sustained and diversified growth, reflecting the effort of Panamanian producers and coordinated work between the public and private sectors,” said Julio Moltó, Minister of Commerce and Industries. [Translated from Spanish]
Frozen shrimp remains Panama’s principal export product with 12.5 percent participation, followed by bananas at 8.5 percent and crude palm oil at 6.7 percent. The ten main tariff fractions collectively represent 54.5 percent of total exports. When including value-added exports from special regimes like free zones and Panama Pacific, the total exported between January and September 2025 reached $988.1 million.
The United States maintains its position as Panama’s primary commercial partner with 15.7 percent participation. Taiwan follows at 12.3 percent, with the Netherlands at 8.5 percent. China, Mexico, India, costa rica, and Cuba remain among the most relevant markets, while Thailand has repositioned itself within the top ten export destinations.
Understanding Deflation’s Economic Impact
Economists monitor deflation carefully because sustained price declines can create destructive economic cycles. As consumers anticipate lower future prices, they often delay purchases, further reducing demand and forcing additional price cuts. Businesses respond to falling revenue by cutting costs, typically through workforce reductions or wage freezes that exacerbate unemployment.
The U.S. Bureau of Labor Statistics explains that while moderate inflation is normal in growing economies, sustained deflation often indicates serious economic problems. Panama’s situation appears consistent with this pattern, where job losses reduce consumer spending power, creating downward pressure on prices across multiple sectors.
Central banks typically have limited tools to combat deflation compared to inflation. Interest rates cannot be reduced below zero, creating what economists call the “zero lower bound” problem. This constraint makes deflation particularly difficult to reverse once established in an economy.
Regional Economic Divergence
The contrasting economic pictures between Panama and its neighbors highlight Central America’s uneven recovery patterns. While Panama and Costa Rica experience deflationary pressures, other regional economies continue implementing monetary tightening measures to control inflation. This divergence complicates regional economic coordination and policy responses.
Panama’s dollarized economy provides particular challenges in this environment. Without independent monetary policy tools like currency devaluation or interest rate adjustments, the country must rely on fiscal measures and structural reforms to stimulate demand. The government faces the difficult task of reigniting domestic consumption without exacerbating budget deficits.
Economic analysts will closely monitor the next Consumer Price Index releases from both countries for signs of stabilization. Any indication that the deflationary trend is accelerating would likely prompt more aggressive policy responses. For now, the unusual situation of falling prices amid economic uncertainty presents a cautionary tale for the region.