Uruguay Inflation


Inflation stable at a six-month low in July, but remains the main economic policy concern

In July, consumer prices rose 0.75% over the previous month, which was above the 0.35% increase recorded in June and marked the strongest increase in five months. The print was above market expectations of inflation remaining at June’s 0.35%. According to the Statistical Institute, the monthly increase was backed by higher prices for all categories with the exception of clothes and housing services, which tallied price drops in July. Among the categories that registered the strongest increases, health care was markedly above the remainder, followed by foodstuffs and non-alcoholic beverages.

Annual inflation was stable at June’s 9.1% in July. Inflation continues to be well above the Central Bank’s target range of 4.0%–6.0%. Moreover, average annual inflation inched up from June’s 9.0% to 9.1% in July, marking the highest level since December 2004.

Despite the Central Bank’s contractive monetary policy stance, which has been in place since late 2013, inflation continues to be at the center of the economic policy debate. In fact, the evolution of prices is likely to condition the debate heading into the presidential elections that will take place in October of this year. So far, most analysts agree that the country’s inflationary pressures stem mainly from the supply side of the economy, especially from the current indexation of wages to inflation. In fact, on 16 July, Finance Minister Mario Bergara shed some light on future developments in this sense. According to Bergara, when the next “Wage Council” takes place in 2016, all parts will have to “detach slightly” from the indexation, moving toward negotiations over the nominal wage. However, he added that it is a priority for the government that before the reconsideration of the indexation it works toward a substantial moderation in inflation. Despite the supply-side inflationary pressures, Bergara also added that the strong growth figures that the economy has posted in the last quarters are making it more difficult for the government and the Central Bank to control inflation stemming from increasing consumer disposable income.

Whereas in the previous month the moderation in annual inflation also had benefitted from a relatively stable exchange rate, July saw a slight depreciation in the Uruguayan peso. Therefore, the exchange rate stability (and slight appreciation) from which inflation benefited in April, May and June ended in July. The Uruguayan peso had closed both April and May at 23.0 UYU per USD and benefited from a slight appreciation in June, closing the month at 22.9 UYU per USD. However, the peso closed July at 23.2 UYU per USD. That said, the latest dynamics of the exchange rate contrast previous months’ developments, when the peso had been depreciating continually from the 21.1 UYU per USD that was recorded at the close of 2013.

LatinFocus Consensus Forecast participants expect inflation to ease to 8.5% by the end of 2014, which is down 0.1 percentage points from last month’s projection. For 2015, panelists see inflation easing further to 7.9%.


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Uruguay Inflation Chart

Uruguay Inflation July 2014

Note: Annual and monthly variation of consumer price index in %. Expectations of monthly variations of consumer price index in %.
Source: National Statistical Institute (INE) and Uruguay Central Bank (BCU).

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