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Friday, July 4th 2003 - 21:00 UTC
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Headlines:
Insufficient inflation in Uruguay; Deflation in Argentina; Chile's inflation flat; Unexpected rise in US unemployment.

Insufficient inflation in Uruguay

The Uruguayan Consumer Price Index recorded a modest 0,16% expansion during June, the lowest inflation since November 2001. This means that during the first six months of 2003 consumer prices increased 6,09% and 24,64% in the last twelve months. The strong deceleration of prices however beneficial in a normal situation is not precisely what the Uruguayan authorities planned for. Following the banking crisis of July/August last year when Uruguay lost two thirds of its financial system deposits (a contagion effect from neighbouring Argentina), the country was saved from a complete economic collapse with a massive bailout rescue plan from the International Monetary Fund and the United States Treasury. Uruguay's Gross Domestic Product shrank dramatically, the local currency lost almost half its value and two digits inflation was targeted as a mechanism to level the bloated government budget paying local suppliers and employees with devalued pesos. However Uruguay in the second quarter of this year managed a successful voluntary rescheduling of a significant proportion of its foreign debt together with a boost in agriculture exports. As a consequence the Uruguayan peso recovered and together with a tight monetary policy (and exceptionally high unemployment), domestic demand has remained flat and stealthy deflation moved in. Local authorities targeted an annual inflation of 20% for 2003, so this means that in the second half, inflation must be "incentivated" to reach 14% (given the 6% of the first half) if the budget primary surplus of 3,5% is to be achieved as agreed with the IMF. Given the rapid deceleration of prices it's hard to see how the Uruguayan government will manage the sufficient revenue to obtain a reasonable budget surplus. With this in mind the Uruguayan government has decided on quarterly increases of public utility rates (average 5%), that if not taken into account would actually have made the retail price index last June a minus 0,13%. Actually with the exception of food (mainly beef, rice, cooking oil, pushed by a strong export demand), housing and to a lesser extend health care, all other items have experienced price deflation.

Deflation in Argentina

For the second consecutive month the retail prices index in Argentina was negative, with a minus 0,1% in June according to the latest release from the National Statistics Institute. "Food" and "clothing" experienced significant drops, minus 0,8% and minus 0.1%, helping the basic basket of staples to decrease 1,4%. However housing and basic services increased 2%. With June and May's deflation the accumulated consumer price index for the first six months of 2003 stands at 2,1%, and 10,2% in the last twelve months. Since the Argentine currency was allowed to float freely in January 2002, consumer prices have risen 43,9%. Wholesale prices also experienced a 0,2% drop totalling a negative growth of 2,5% during the first six months of 2003. The revaluation of the Argentine currency against the US dollar plus the easing of fuel prices contributed to the negative reading.

Chile's inflation flat

Consumer prices in Chile remained unchanged during the month of June bringing the total inflation for the first six months of 2003 to 1,6%, and 3,6% in the last twelve months. According to the official monthly report, in June food, health services, housing and education experienced modest increases which were compensated with drops in transport and clothing. Chilean Finance Minister Nicolás Eyzaguirre cheered the news saying that "three months of flat or negative increase of retail prices confirms our forecast last March when we insisted it was a transitory phenomenon". Mr. Eyzaguirre indicated that contrary to the beginning of the year when the Iraq crisis, oil prices and the US dollar exchange rate situation have reverted, and together with moderate salary rises "the Chilean economy now has a clear horizon free of inflationary threats and ideal for a strong sustained recovery". However Mr. Eyzaguirre pointed out that "government is concerned because Congress hasn't approved some tax reforms needed to ensure a long term balanced budget". The current administration of President Ricardo Lagos is pressing Congress for additional taxes on fuel, beverage and tobacco to compensate the expected tariff losses once the free trade agreements with the European Union, United States and South Korea become effective.

Unexpected rise in US unemployment

Unemployment in the United States last June reached 6,4%, its highest level in nine years, an unexpected surprise for analysts and a clear signal that recovery is much milder than anticipated. Last May unemployment was 6,1% while economists estimated that in June it would reach 6,2%. The number of non agriculture job losses also was higher than forecasted, 70,000 instead of the originally estimated 17,000, and most of them in manufacturing 56,000. Besides the number of weekly work hours remained unchanged which is not a good signal since when a rebound companies tend to increase the number of working hours before contracting new staff. Actually in the last three months unemployment has increased by 913,000, and in the last two years 2,6 million jobs have been lost. This last week the US Federal Reserve lowered its basic interest rate to 1%, its lowest since 1958. However the Dow-Jones index in the last three months increased 15% pushed by a growing optimism that the fundamentals of the US economy are sound together with lower interest rates and the massive tax cut program recently approved by Congress.

Categories: Mercosur.

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