Uruguay: Inflation recedes for second consecutive month in April
May 5, 2014
In April, consumer prices fell 0.06% over the previous month, which contrasted the 0.58% increase recorded in March. The print came in below market expectations of a 0.30% increase. According to the Statistical Institute, the monthly drop in consumer prices came on the back of a sharp fall in prices for health services, which more than offset the increase tallied in ten of the twelve components that make up the index. A drop in the health services category, which occurred because the government reduced the amount that businesses and individuals pay as contributions to the social security system, drove April's fall.
Annual inflation edged down from 9.7% in March to 9.2% in April, which marked a three-month low. Moreover, annual inflation eased for the second consecutive month in April. Despite the moderation, inflation remains well above the Central Bank's target range of 4.0%-6.0%.
The government has introduced various measures to curb inflation in recent months. This month's reduction of contributions to the social security represents another attempt by the executive to curb inflation. Most analysts expect that these initiatives are likely to reduce inflation temporarily. However, analysts also believe that the effects will prove to be transitory and that they will not address the main drivers of Uruguay's structural inflation problem, which is related to wage indexation. The country is currently looking for alternatives to its inflation-indexed wage growth. The main alternative that is being discussed is a wage-indexation to GDP growth, which could potentially reduce the inflation inertia that its current indexation has.
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 7.6%.