Uruguay: Government cuts VAT, inflation inches down in March
April 3, 2014
In March, consumer prices rose 0.58% over the previous month, which was below the 1.66% increase recorded in February. The print exceeded market expectations of a 0.35% increase. According to the Statistical Institute, the monthly rise in consumer prices reflected that a sharp drop in prices for communications was more than offset by an increase in prices for education, food and non-alcoholic beverages as well as for transport.
Annual inflation inched down to 9.7% in March from the 9.8% tallied in February, which had marked the highest rate since August 2004. Despite the moderation, inflation remains well above the Central Bank's target range of 4.0%-6.0%.
On 11 March, Finance Minister Mario Bergara unveiled a legislative initiative to fight supply-side inflation. The measure introduced value-added tax (VAT) exemptions on Antel and UTE tariffs, the state-owned telecommunications and energy companies, respectively. The reductions were retroactively effective since 1 March. Moreover, on 14 March, Bergara reached an agreement with retailers in order to hold prices of basic goods for 60 days.
Most analysts affirm that the fiscal costs of the VAT cuts are estimated around USD 100 million (approximately 0.2% of GDP). Moreover, analysts expect that the initiative is likely to reduce inflation temporarily. However, analysts also agree that the effects will prove transitory and will not address the main causes of Uruguay's structural inflation problem, which is related to wage indexation.
LatinFocus Consensus Forecast participants expect inflation to drop to 8.6% by the end of 2014, which is unchanged from last month's projection. For 2015, panelists see inflation at 7.5%.