MercoPress. South Atlantic News Agency

Lowering the price of power, Uruguay ends 2012 with an inflation of 7.48%

December recorded negative inflation, the first month in forty years

Consumer prices in Uruguay ended the year at 7.48% after recording the lowest December percentage in forty years: a negative 0.73%. However analysts and consultants anticipate that inflation in the first quarter of 2013 will remain above an annualized 8%.

But the 7.48% index is crucial for the annual round of salaries’ negotiations scheduled to begin this month particularly since the October and November twelve month inflation index were above 9% until the administration of President Jose Mujica implemented drastic measures avoiding the two-digits that would have triggered salary discussions every four months.

According to the Stats Office, the item Housing experiencing an unexpected plunge as the sub-item Power (which is supplied by the state owned company UTE) was down 19.2% helping the 24-month ascending inflation curve to fall in the largest monthly drop since 1973.

The manipulation of the public utility rate based on a matching prize to consumers, who cut their consumption, was also helped by an October agreement with supermarkets that kept a basic basket of 200 items frozen until January. This meant that Food and beverage only increased 0.25% in December and 0.30% in November, ending the twelve months with 10.8%.

This item together with Education, Restaurants and Hotels, Health, Furniture and home appliances increased above the annual 7.48%.

On the positive side, 7.48% consolidates nine years of inflation below two digits, the longest period since records started but also the fifth year in nine that the index is above the Central Bank’s target of 4% to 6%.

In effect inflation in 2011 reached 8.6% and in each month, no annualized index was on target. Likewise in 2012 when at mid year the annualized inflation was above 8%. Furthermore last October the consumer prices’ index in the first ten months stood at 9.11% with two more ahead normally of heavy spending because of the Christmas and New Year holidays.

The challenge will be January 2013 when the cheaper power rates system ceases and the agreement with supermarkets falls. To this must be added the increase in beef prices (4.5%), a staple for Uruguayans, plus dearer transport and private health schemes, as of January first.

“As was anticipated beginning January second the 200 products that had a rebate of 10% (in November and December) automatically readjust and we are also waiting for the price lists from suppliers with increases”, said Fernando Vieites, president of Uruguay’s Supermarkets Association.

The Mujica administration still has a card to play and that is lowering fuel prices, also a government monopoly, and for which it has eliminated several taxes. Besides in the last week of December the Central bank Monetary Policy Committee (CPA) increased the reference rate from 9% to 9.25% hoping to discourage consumer spending on credit.

On the not so positive side, the government revealed that UTE losses in the eleven months of last year, excluding generous December, were over 180 million dollars. Likewise the Uruguayan central bank in the first three days of 2013 has been forced to intervene in support of the US dollar purchasing over 160 million dollars in an effort to ensure the competitiveness of Uruguayan exports.

The Central bank CPA in its report said that if the inflationary threat is not challenged “there is a risk of interrupting and even reverting partially the growth, competitiveness, poverty reduction and income distribution improvement achievements”.

“Even when 12-month inflation has been reduced considerably this does not necessarily imply that tensions in the price system have been overcome”, added the release.

The IMF warned in its latest report that “tackling inflation is Uruguay’s priority” adding that monetary policy cannot fight inflation alone “given capital inflow concerns concerted efforts on other fronts are also necessary, in particular, fiscal policy could better support monetary policy”.

IMF also pointed out that “recent initiatives to cut/freeze some consumer prices create distortions without addressing the root causes of inflation. In the view of the mission, extensive wage indexation is a key reason why price shocks feed into wages and core inflation”.