Financial Times | Venezuela: when a drop in inflation is not a drop

May 5, 2012 11:32 am0 commentsViews:

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After falling for five straight months, with April figures showing the slowest increase in prices in the last four years, Venezuela’s economic officials seemed to suggest on Thursday that they were finally beginning to get inflation under control.

It would be nice if that were the case. But it hardly seems likely.

Sure, the 0.8 per cent rise in consumer prices in April is worth crowing about, and it’s not surprising that with presidential elections around the corner the government wants to show that it is doing something about what is one of the highest inflation rates in the world.

But for one thing, inflation is still incredibly high, with the year-on-year measure now at 23.6 per cent, down from 24.6 per cent in March.

And for another thing, it’s not terribly likely that the downward trend in inflation will continue for much longer, as the government ramps up spending ahead of the elections.

Only last month, Fitch Ratings said it was so concerned about the growth in opaque, discretionary off-budget spending that it saw fit to revise the rating outlook for Venezuela’s debt from stable to negative.

What’s more, the main reason that the official rate of inflation is moderating is that underlying inflation is being masked by a raft of new price controls. For example, manufacturers are being forced to lower the price of a number of personal care products by up to 25 per cent.

And this kind of pressure could well get worse as elections approach.

As Alfredo Ramos of Goldman Sachs put it in a note to clients on Thursday:

We expect the number of controls and forced price cuts to increase ahead of the October elections, which is likely to increase repressed inflation and eventually lead to growing levels of scarcity.

Whatever the government may say, it doesn’t look like it’s close to taming inflation just yet.