MercoPress. South Atlantic News Agency

April retail prices hike questions Uruguay's inflationary target

Economy minister Danilo Astori

Alarm bells are ringing in Uruguay following the release of April's Consumer Prices Index, 1.22% totaling 4.58% in the first four months of 2007 and 8.11% in the last twelve months, when the overall target for this year was established in the range of 4.5% to 6.5%.

The government reacted by extracting liquidity from the market and officials are confident that the index will begin to drop considerably in the second half of the year as weather improves and the provision of fresh vegetables and fruit begins to normalize, following recent hikes of up to 90% because of excessive rains. Grain and oil seed prices are also expected to stabilize. However market analysts are not that certain and believe more tough monetary measures, including higher interest rates are needed, if inflation is to remain below two digits at the end of 2007. Economy minister Danilo Astori said "inflation was under control" and anticipated that the Central Bank targets will be achieved based on fiscal and credit policies. Economist Juan Carlos Protasi said it's "kind of contradictory" to keep the US dollar price at the current level and at the same time allow real salaries to increase at an annual rate of 5%. Gabriela Mordecki from the Economics Institute of Uruguay's national University said inflation is not only being influenced by "food prices" but also by increasing "labor and government costs". "To get prices back under control, the US dollar must be let to float freely and appreciate", argues economist Pablo Rosselli who insists that the underlying inflation remains "far too high". The Uruguayan government is applying a mix of orthodox economics with "social responsibility" which means a recovery of salaries and pensions not necessarily in line with productivity and this has an impact in labor costs particularly for exporters which are compensated with a "strong" US dollar. But a global abundance of dollars fuels liquidity, and inflation, and the vicious circle. Economists and market analysts expect May to be a "strong" inflationary month because fuel costs have increased 2.5%; beef 5%; flour and cereals 12% and fresh vegetables remain at record prices. "This is a complicated scenario for government estimates and given the current situation I should be inclined to anticipate inflation for 2007 in the range of 10 to 11%, even with a strong contractive monetary policy" forecasted Protasi.