Peru's hyperinflation and the 1990 stabilization shock

Peru's inflation spiraled out of control in the final years of Alan Garcia's presidency, reaching a monthly rate of 114% in September 1988 and an annual rate the central bank's own researchers later calculated at 7,482% for 1990, a collapse rooted in what the Banco Central de Reserva del Peru describes as years of fiscal dominance, where the central bank was forced to monetize deficits it had no independent authority to resist. The incoming government of Alberto Fujimori responded in August 1990 with a sweeping stabilization package, popularly remembered as the 'Fuji shock', that corrected exchange rates and administered prices in one move and introduced, for the first time in Latin America, direct controls on monetary aggregates rather than relying solely on exchange-rate anchoring. The results were immediate and dramatic: annual inflation fell from 7,482% in 1990 to 409% in 1991 and continued falling through the early 1990s. A new constitution adopted in 1993 locked in the central bank's independence, prohibiting it from financing the treasury, a legal safeguard the BCRP's own retrospective research credits as the structural reason hyperinflation never returned even through later political and external shocks.