Consumer prices in Uruguay rose 0.93% during August, above expectations and leaving the Central bank with not much margin to apply counter measures. In the twelve months to August inflation was 7.88%, up from July’s 7.48%.
Food and health prices had a major impact in the monthly index although partly balanced by strong power savings (and bills), following on a successful campaign to save electricity. According to the official release if it were not for the savings which the bank computes as a lower utility rate, the monthly index would have climbed to 1.1%.
However for September things are bound to change. The power saving effect will be over (consumer saves one watt, the government monopoly energy company matches with a one watt charge less) and the electricity rate was increased 4.6% effective September first.
In the first eight months of 2012 inflation has reached 5.39% which will be beyond the Central bank target range of 4% to 6%.
For the central bank prospects are also challenging. With the reference monetary rate still at 8.5%, it already represents an instrument of contractive policy which is geared to drain pesos and help contain inflation.
But the other side of the coin is that it also pushes the price of the US dollar down, with an impact for exporters and foreign investors tempted with such a high reference interest rate, now even higher than the regional champion, Brazil.
“We need a different mix of economic policies with a significant moderation in salaries and fiscal policies so as to give monetary instruments more ‘oxygen’, if not we run a serious risk of loss of competitiveness with Brazil, which is our reference”, warned Florencia Carriquiry from Deloitte’s.
She added that given the sustained increase in salaries and domestic costs, plus the expected impact of international food prices such as wheat, soybeans and beef, “inflation at the end of the twelve months will be in the range of 8%:
Former minister and Planning Secretary Javier de Haedo argues that the central bank is targeting inflation and the real exchange rate, “which is correct in the current regional and global scenario” and means inflation above 8% for the whole year. Otherwise to lower inflation the government would have to implement fiscal and real-wages policies, “but this is a complicated moment”.
Aldo Lema an economist with Vixion Consultants anticipated further months of high inflation, however the twelve month figure will fluctuate in the range of 8%. To bring inflation down what are needed are signals of fiscal tightening, moderation in salaries and expectations that prices will effectively converge to a target percentage.
But Uruguay has a long history of overshooting its inflation targets and President Jose Mujica has repeatedly said that “a little faster inflation and people happy, is better than keeping strictly to what the text books say, and people not so happy”.