Uruguay: Government plans to cut VAT as inflation reaches near-decade high in February
March 13, 2014
In February, consumer prices rose 1.66% over the previous month, which was below the 2.44% increase recorded in January. The print exceeded market expectations of a 1.00% increase. According to the Statistical Institute, the monthly rise in consumer prices was mainly driven by higher prices for food and non-alcoholic beverages as well as for household items. Annual inflation rose to 9.8% in February, which was up from the 9.1% tallied in January and marked the highest value since August 2004. Consequently, 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 measures include VAT reductions in electricity and telecommunications and in fruits and vegetables. Higher prices for fruits and vegetables pushed inflation higher in previous months. Bergara argued that the measure, “does not fight structural inflation,” but avoids supply-side, “temporary situations, such as floods,” which have contributed to price increases in the first months of the year. The measures will be presented to Parliament and during the week of 17-23 March. Economic analysts estimate that the implementation of these tax measures will reduce tax revenues by USD 100 million. LatinFocus Consensus Forecast participants expect inflation to drop to 8.1% by the end of 2014, which is up 0.1 percentage points from last month's projection. For 2015, panelists see inflation at 7.5%.