Consumer prices in Uruguay rose sharply again in May, led by steep increases in prices at restaurants and hotels, for housing and for health costs accumulating 8.53% in the last twelve months and 4.34% in the five months of 2011.
Inflation measured by the consumer price index rose 0.33% month-on-month in May, compared with a 0.34% gain in April the national statistics agency INE reported Thursday. The Uruguayan government has been struggling to rein in rising prices in recent months as inflation climbs significantly higher than its target.
Last March, the Central Bank of Uruguay raised its benchmark interest rate by 100 basis points to 7.5% to keep a lid on inflation. The Central bank Macroeconomic Coordination Committee has set a target of 4%-to-6% inflation for the 12-month period ending June 2012.
Restaurant and hotel prices were up 0.73% on the month in May, fuelled by higher prices for wheat flour, beef and fish, INE said. Restaurant and hotel prices have led price gains over the past year, rising 14.28% since May 2010.
Housing costs jumped 0.6%, largely due a 4% rise in property taxes and higher rental values, according to INE. Health costs rose 0.49% on the month. Food and non-alcoholic beverage prices in May posted more moderate gains, rising 0.22%, but are up 11.34% on the year. However during May, a surprising mild weather has helped with a significant drop in fresh fruit and vegetable prices.
Analysts anticipate that June will see another consumer inflation peak, although prices should begin to ease in the second half of the year helped by a strong Peso vs the US dollar that is helping to moderate fuel and attract a significant influx of ‘cheaper’ imports.
The Central Bank Monetary Policy committee is scheduled to meet next June 23 and will have to decide on a further increase in the basic interest rate supported on the performance of the Uruguayan economy, the latest labour contracts and inflation projections for the coming months.
However there is a growing consensus among local economists that the Uruguayan economy is overheating: high growth above potential, historically low unemployment and inflation clearly above target.
The government to contain inflation is betting on the exchange rate letting the US dollar to fall maybe to 17 pesos from the current 18.50 pesos, “but fiscal policy must adapt to potential growth (4%) and to a budget surplus”.
Given the state’s monopoly of power, fuel and running water, the government has been delaying adjusting administrative prices, and the same has done with some basic staples such as milk and bread, thus also helping to contain inflation.
A basic basket of goods and services for low income families, during May, was estimated by the National University’s Economics Department at 27.531 pesos, equivalent to 1.500 US dollars.
INE also released the evolution of prices in the construction industry which showed that in the first four months of 2011 they have reached an accumulated 1.7%. In April construction costs were up 0.41% but have accumulated 12.44% in the last twelve months.
One of the main items in the construction cost equation have been the price of materials up 0.995 in April, 3.42% in the four months and 9.55% in the last twelve months.