MercoPress. South Atlantic News Agency

Stubbornly high inflation in Uruguay for another two years forecasts Capital Economics

The deeply Mujica administration does not have the stomach to address the challenge of high inflation

Uruguay’s stubbornly high inflation is as much structural in nature as it is due cyclical factors and to bring it down requires changes in fiscal policy, tackling widespread salary indexation and policymakers need to enhance their credibility according to Capital Economics.

The report expects inflation in Uruguay to remain above target for the next couple of years and doubts the current administration has the stomach to address the challenge, because two years have passed since President Jose Mujica announced ‘inflation stops here’ and not much has happened.

“The conventional view is that overheated domestic demand is stoking price pressures. Many argue that this has been exacerbated by a torrent of foreign capital inflows” and there is certainly some truth in this, but it fails to adequately explain the apparent ‘stickiness’ of headline inflation over several years, argues the Capital Economics report.

And then insists that three policy areas must be addressed: fiscal policy is too loose and needs to be tightened; the government must tackle widespread wage indexation which is needed to break the feedback loop between wages and prices and finally policymakers will have to take steps to enhance their credibility with “clearer communication and more frequent central bank meetings”.

But Capital Economics is sceptical since the Mujica administration is deeply divided and elections are scheduled in eighteen months time.

Meantime a mixture of ad-hoc policy measures and slower growth will probably be enough to prevent headline CPI from reaching double-digit annual rates, but even so inflation in Uruguay is set to remain among the highest in the region for at least another couple of years.