MercoPress. South Atlantic News Agency

February confirmed that inflation remains Uruguay's main challenge

Exceptional wet weather caused fresh food prices to soar

Inflation in Uruguay during February reached 1.66% which is equivalent to 9.82% in the last twelve months, the third highest in South America behind Venezuela and Argentina.

 In the first two months of the year, consumer prices climbed 4.14%, since in January the index was 2.44% the highest since September 2002 in the midst of the crisis contagion from the Argentine default and melting of its economy.

Inflation in 2013 in Uruguay reached 8,52% after the government froze for two months (government controlled) public utilities rates plus other administered prices such as public transport, health care and milk.

This helped end the twelve months of 2013 below two-digit inflation which can be highly disturbing since the agreement with Uruguay's powerful organized labor is that 10% immediately triggers a round of negotiations and means 12, 18 and 24 month salary agreements automatically drop.

February showed that the item with the greatest influence was food because of the flooding caused by excess rainfall which saw vegetable and some fruit prices soar up to 19%. Other items which had an impact were education, 4.96%, (the school year in Uruguay begins in March); furniture, household appliances, 4.63% and restaurants and hotels, 1.77%.

According to local analysts the Uruguayan government in an electoral year to keep prices under control and below the two-digits will have to again freeze or reduce the cost of public utilities (energy, drinking water, communications), reach an agreement with the main food suppliers to elaborate a basket of basic food items, as it has done in previous years, or keep draining the money supply and thus making credit more expensive.

This last option does not seem very feasible when Uruguayans will be electing a new president and congress next October, and domestic consumption has been one of the main dynamos of the economy.

Nevertheless some Uruguayan economists have cautioned the government of President Jose Mujica about the unorthodox mechanisms applied to bring down the inflation index on paper, since there is the bad example and temptation of the neighbor which for years has been manipulating stats' indexes.

The IMF, World Bank, the Economic Commission for Latam and the Caribbean plus private institutions, credit rating agencies and local think-tanks have insisted the main challenge faced by the Uruguayan economy, besides the instability of its two large neighbors is inflation, which must be addressed.

Particularly since the Uruguayan economy has been growing year after year since 2003/04.