Identifier
Created
Classification
Origin
06BUENOSAIRES1132
2006-05-17 18:17:00
UNCLASSIFIED
Embassy Buenos Aires
Cable title:  

APRIL 2006 INFLATION UPDATE AND PREDICTIONS

Tags:  EFIN ECON ELAB ETRD ALOW AR 
pdf how-to read a cable
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DE RUEHBU #1132/01 1371817
ZNR UUUUU ZZH
R 171817Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4581
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2176
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5538
RUEHMN/AMEMBASSY MONTEVIDEO 5567
RUEHSG/AMEMBASSY SANTIAGO 5142
RUEHBR/AMEMBASSY BRASILIA 5340
RUEHSO/AMCONSUL SAO PAULO 2897
RUEHRI/AMCONSUL RIO DE JANEIRO 1990
UNCLAS BUENOS AIRES 001132 

SIPDIS

PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
PASS USTR FOR LESLIE YANG
TREASURY FOR RAMIN TOLOUI AND CHRIS KUSHLIS AND OCC
FOR CARLOS HERNANDEZ
USDOC FOR ALEXANDER PREACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ELAB ETRD ALOW AR
SUBJECT: APRIL 2006 INFLATION UPDATE AND PREDICTIONS


-------
SUMMARY
-------

UNCLAS BUENOS AIRES 001132

SIPDIS

PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
PASS USTR FOR LESLIE YANG
TREASURY FOR RAMIN TOLOUI AND CHRIS KUSHLIS AND OCC
FOR CARLOS HERNANDEZ
USDOC FOR ALEXANDER PREACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ELAB ETRD ALOW AR
SUBJECT: APRIL 2006 INFLATION UPDATE AND PREDICTIONS


--------------
SUMMARY
--------------


1. The Consumer Price Index (CPI) rose 1.0 percent in
April, bringing the 12-month inflation rate to 11.7
percent. Average nominal salaries increased 0.9
percent in March and the purchasing power of salaried
workers in March was 5.3 percent higher than in March

2005. The poverty rate fell to 33.8 percent in the
second half of 2005, down from 38.5 percent in the
first half, while the destitution level declined to
12.2 percent from 13.6 percent. The Central Bank's
survey of market expectations projects CPI inflation
to be 0.8 percent in May and 12.3 percent for all of

2006. The GOA's anti-inflation policy identifies
relative price adjustments and profiteering as the
main sources of inflation and attacks them with price
and cost controls. Research from many reputable
sources indicates, however, that Argentine inflation
is mainly the result of monetary and fiscal factors,
indicating that the GOA should focus on macroeconomic
remedies that have historically been more effective in
fighting inflation. End Summary.

--------------
THE CONSUMER PRICE INDEX
--------------


2. The official Consumer Price Index (CPI) was 1.0
percent higher in April 2006 than in March 2006, above
the 0.8 percent predicted by the Central Bank's (BCRA)
consensus forecast. April inflation brought 12-month
inflation to 11.7 percent. Prices of Goods increased
1.0 percent and Prices of Services increased 0.9
percent in April. Prices of seasonal goods increased
by 2.5 percent, regulated prices increased 0.2
percent, and the rest, which constitutes "core
inflation," increased 0.9 percent in April. Core
inflation was 12.7 percent between April 2005 and
April 2006. The official CPI measures inflation only
in the Greater Buenos Aires urban area.



3. Clothing, Entertainment, and Housing and Basic
Housing Services were the three CPI components with
the highest monthly price rises in April, increasing
5.5 percent, 1.5 percent and 1.0 percent,
respectively. Education was the CPI component that
increased the most between April 2005 and April 2006,
posting a 19 percent increase. Education was followed
by Clothing, which rose 14.8 percent, and Food and
Beverages, which increased 13.8 percent.

TABLE I
CONSUMER PRICE INDEX (1999 = 100)

CPI PCT CHG CORE INFLATION
YEAR PREV YR PCT CH PREV YR

2001 -1.5 n.a.
2002 41.0 n.a.
2003 3.7 n.a.
2004 6.1 6.4
2005 12.3 14.2

CPI PCT CHG CORE INFLATION
PREV MO PCT CH PREV MO

2005
JAN 1.5 1.1
FEB 1.0 1.3
MAR 1.5 2.2
APR 0.5 0.8
MAY 0.6 0.6
JUN 0.9 1.1
JUL 1.0 1.0
AUG 0.4 0.9
SEP 1.2 0.9
OCT 0.8 0.7
NOV 1.2 1.4
DEC 1.1 1.4

2006
JAN 1.3 0.7
FEB 0.4 0.7
MAR 1.2 1.7
APR 1.0 0.9

Source: National Bureau of Statistics and Census
(INDEC).

--------------
POVERTY AND DESTITUTION LEVELS
--------------


4. INDEC publishes a monthly estimate of the value of
a "total consumption basket" and a "food consumption
basket." These baskets are based on estimates of the
minimum nutritional requirements and other consumption
habits of people of different ages. These estimates
determine the official poverty line and the official
destitution line, respectively. For a family of four
in April, the poverty line was ARP 857.60 (USD 280)
and the destitution line was
ARP 397.03 (USD 130). A family of four is defined as
a man and a woman in their thirties, an eight-year-old
girl and a five-year-old boy.


5. The peso value of the poverty line decreased 0.3
percent in April, and rose 11 percent in the April
2005 - April 2006 period. The peso value of the
destitution line decreased 0.7 percent in April, and
rose 12.5 percent in the April 2005-April 2006 period.


6. The percentage of people living below the poverty
line was 33.8 percent in the 28 most important urban
areas of Argentina in the second half of 2005. The
percentage of the poor was 38.5 in the first half of
2005, and 40.2 percent in the second half of 2004.
The percentage of people living below the destitution
line was 12.2 percent in the 28 most important urban
areas in the second half of 2005. The percentage of
the destitute was 13.8 percent in the first half of
2005, and 15.0 percent in the second half of 2004.

--------------
AVERAGE NOMINAL SALARIES
--------------


7. INDEC estimated that average nominal salaries
increased 0.85 percent in March 2006 over February

2006. Inflation was 1.2 percent during that period.
The average nominal salary increase in March was due
to increases of 1.2 and 0.7 in formal and informal
private sector salaries, respectively, while public
sector salaries were unchanged. Public sector
salaries include salaries of both federal and
provincial employees.


8. Average nominal salaries grew by 17.0 percent
between March 2005 and March 2006. This growth was
due to increases of 21.0, 17.6 and 7.1 percent in
formal private sector, informal private sector and
public sector salaries, respectively. Inflation in
the same period was 11.1 percent. Therefore, the
purchasing power of the average salaried worker in
March 2006 was on average 5.3 percent higher than it
was in March 2005. Both formal and informal private
sector salaries had significant gains in purchasing
power of 8.9 and 5.8 percent, respectively. However,
public sector salaries experienced a 3.6 percent
decline.

--------------
WHOLESALE PRICE INDEXES
--------------


9. The Wholesale Price Index (IPIM) increased 1.5
percent during April 2006, bringing the total IPIM
increase since April 2005 to 11.0 percent. This index
measures the price changes of national products
(including Primary Products and Manufactured Goods and
Electric Power) and imports sold in the domestic
market. The IPIM also includes taxes. The 1.5
percent increase in April was due to a 4.1 percent
increase in Primary Product prices and a 0.7 percent
increase in Manufactured Goods. The increase in
Primary Products was largely the result of a 9.0
percent increase in Oil and Gas prices, and a 6.6
percent increase in Fish prices. Electric Power
prices did not change. Import prices increased 0.6
percent.


10. The Wholesale Basic Prices Index (IPIB) has the
same coverage as the IPIM, except that it excludes
taxes. The IPIB increased 1.6 percent in April,
bringing the total IPIB increase since April 2005 to
11.5 percent. The 1.6 percent increase in April was
due to a 3.9 percent increase in Primary Product
prices and a 0.7 percent increase in Manufactured
Goods. Electric Power prices did not change. Import
prices increased 0.6 percent.


11. The prices for the sectors measured in the IPIM
and IPIB are weighted using the corresponding value of
product net of exports. INDEC has devised another
index, the Basic Prices to Producers Index (IPP),
whose weights are calculated considering sales in the
internal market as much as sales to the external
market and excluding imports and taxes. The IPP
increased 1.7 percent in April 2006, bringing the
total IPP increase since April 2005 to 11.8 percent.
Primary Products increased 4.1 percent and
Manufactured Goods increased 0.7 percent. Electric
Power prices did not change.

--------------
CONSTRUCTION COSTS
--------------


12. The INDEC index measuring private housing
construction costs in Greater Buenos Aires increased
1.3 percent in April. These costs were 15.7 percent
higher than in April 2005. The April increase is the
result of a 1.6 percent increase in materials, a 1.0
percent rise in labor costs, and a 0.3 percent
increase in other construction costs. Wages of
salaried employees working for the sector increased
0.8 percent and payments to the self-employed grew 1.6
percent. Professional fees are not included among the
labor costs considered by INDEC in the construction
sector.

--------------
INFLATION PREDICTIONS FOR 2006
--------------


13. The GOA's national budget includes a 9.1 percent
inflation forecast for 2006. The BCRA monetary
program for 2006 announced on December 29, 2005,
established an inflation target of between 8-11
percent for 2006. According to the BCRA's last survey
of market expectations published on April, CPI
inflation is expected to be 0.8 percent in May, and
12.3 percent in 2006, the same rate as for 2005.

--------------
COMMENT
--------------


14. The GOA's decision to focus its anti-inflation
policy on widespread price restraint agreements, price
controls, cost controls and export bans, reflect the
GOA's view that inflation in Argentina is due to
microeconomic problems. Both the GOA and the Central
Bank (BCRA) argue that the major causes of inflation
is relative price adjustments from the 2002-2003
devaluation of the peso, and profiteering, primarily
by retailers, abusing their market power.


15. Research from many reputable sources indicates,
however, that inflation in the Argentine economy is
mainly the result of monetary and fiscal factors. For
example, Deloitte Argentina Chief of Economic Analysis
Luis Secco demonstrated recently that price increases
have been generalized since early 2005, with price
increases in 75 percent of all CPI components. If
this were the result of relative price adjustments, as
the BCRA and GOA have argued, we should be seeing some
prices increasing sporadically while many others
remain stable. Secco also showed that the ratio
between consumer prices and wholesale manufacturing
prices is well below pre-devaluation levels, so price
increases also are not the result of profiteering by
retailers. This research indicates that the GOA
should focus on macroeconomic remedies that have
historically been more effective in fighting inflation
than price and cost controls.


16. To see more Buenos Aires reporting, visit our
classified website at:
http://www.state.sgov.gov/p/wha/buenosaires

GUTIERREZ