Uruguay: Inflation falls slightly in August, but remains an economic policy concern
September 3, 2014
In August, consumer prices rose 0.75% over the previous month, which mirrored July’s increase. The print was below market expectations of inflation reaching 0.84%. According to the Statistical Institute, the monthly increase was backed by higher prices for almost all categories, with the largest increases recorded in education and food and non-alcoholic beverages. In contrast, prices for clothing and footwear declined.
Annual inflation fell slightly from July’s 9.1% to 8.8% in August, which marked the lowest rate in eight months. Inflation is still well above the Central Bank’s target range of 4.0%–6.0%. Average annual inflation was constant at July’s 9.1% in August. It is crucial for Uruguay to keep annual inflation below 10.0%, otherwise all labor contracts are entitled to a new round of negotiations.
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. According to Finance Minister Mario 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, prior to reconsidering indexation, it works toward a substantial moderation in inflation.
The Uruguayan peso followed July’s trend and depreciated further in August. The peso closed August at 23.8 UYU per USD, which was weaker than July’s 23.2 UYU per USD. Whereas the moderation in annual inflation had also benefitted from a relatively stable exchange rate in May and June, the Uruguayan peso has been depreciating since July.