MercoPress. South Atlantic News Agency

Inflation in Uruguay falls for the fourth month running but still above target

In a year of many distortions from external factors the fall in inflation is important, said economist Mordecki

Consumer prices in Uruguay during May increased 0.32% and 8.06% in the last twelve months which is still above the annual top target range of 6%, but on the positive side for the fourth month running inflation has been decreasing, according to the latest release from the stats office INE.

In the first month of the year inflation was 1.99% but in February it was down to 0.99%; March, 0.66% and in April, 0.45%.

A Central bank poll of private estimates had anticipated an average 0.38% for May.

Uruguay has been unable to keep to the annual target range of 4% to 6% since 2011.

“Inflation has been easing and it is very important in a year quite distorted because of external factors which forced the index above its range target” said Gabriela Mordecki, head of the Economy Department from Uruguay’s main university.

“Because of seasonal reasons, July and August tend to be months of high inflation which should not surprise us. But with these low months we have better annual prospects”

Items with the highest increases were furniture and home appliances with 2.7% and clothing and footwear, 1.29% because of the beginning of the autumn-winter season.
Another significant item with 0.52% was housing because of increases in rents, taxes and heating, particularly wood.

However “food and non alcoholic beverage” which had been the main boost in previous months in May had a negative performance, minus 0.37% because of lower prices for meats and vegetables.

“What is really interesting is that the item which most falls is the one that pushed inflation ahead in previous months. This is really positive and was expected for several months” said Mordecki.

However despite the decreasing tendency, the US bank JP Morgan in a release said that annual inflation in Uruguay will continue to increase in coming months.

“We expect inflation to increase from 7.5% in 2012 to 8% this year, before moderating to 7% in 2014”, said Franco Uccelli from JP Morgan.

Uccelli forecasted that the Uruguayan central bank will leave the basic interest rate at 9.25% at its next meeting at the end of June, despite the fact that the consumer prices index remains above target.

“The need to contain the influx of speculative short term capital and preliminary evidence suggesting the economy could be slowing down have generated a disincentive to increase short term interest rates”, added Uccelli.

Last March the central bank left the basic interest rate unchanged following two consecutive increases of 25 basic points in September and December 2012.

To reinforce the anti-inflation policy, since April the central bank increased the mandatory reserves that financial institutions must hold in the bank.

However despite the challenge posed by a stubborn inflation, above target for three years running, the Uruguayan government is divided on how to address the issue of the massive inflow of short term speculative capital that strengthens the Uruguayan Peso, cheapens the US dollar thus making exports less competitive and imports more accessible, with its impact on the jobs’ market.

The orthodox approach is to fight inflation and contain expenditure which is currently running at a deficit of 2.3% of GDP, with a booming economy, while the less orthodox wants to further tax corporations, the inflow of speculative capital, while keeping a level of expenditure in line with promises of better national distribution and in preparation for next year’s presidential election.

This line of thinking wants a dearer dollar to help exports, support jobs and economic activity, and does not consider inflation such a challenge even when a cheap dollar has helped prop domestic demand.

It is an ongoing dispute which has yet to be worked out and runs parallel to potential candidacies for next year.

Not to mention events in the two large neighbours and leading South American economies: Argentina is ever more closed and protectionist as it approaches October mid term elections and Brazil despite all the financial sacrifice from the government, seems unable to regain a satisfactory growth rate.

The INE also published the wholesale prices index or Production Prices Index, which in May dropped 0.91% compared to April which means that in the five months of 2013 it has increased 0.01% and in the last twelve months, 1.22%.

This month’s decrease can be explained because of agriculture prices, down 1.38% and also manufacturing was down, 0.66%.