FEBRUARY 2006 INFLATION UPDATE AND

UNCLAS BUENOS AIRES 000592 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 ALOWAR SUBJECT: FEBRUARY 2006 INFLATION UPDATE AND PREDICTIONS -------------- SUMMARY -------------- ¶1. The Consumer Price Index (CPI) rose 0.4 percent in February. This brings the 12-month inflation rate to 11.5 percent. Food and Beverages, and Medical and Health Care Services were the two CPI components with the highest monthly price rise in February, even though the GOA had launched price control measures for food, beverages and medicines. Average nominal salaries increased 1.7 percent in January and the purchasing power of salaried workers in January 2006 was 5.3 percent higher than in January 2005. Official surveys put the percentage of people living below the poverty line at 38.5 percent in the first half of 2005, down from 40.2 percent in the previous semester. The percentage of people living below the destitution level dropped to 13.6 percent during the first half of 2005, down from 15.0 percent in the previous semester. However, the peso value of the poverty line and the destitution line grew 0.6 percent and 1.1 respectively, in February. According to the Central Bank's survey of market expectations, whose methodology changed recently, CPI inflation is expected to be 1.2 percent in March, and 12.9 percent in 2006. End Summary. -------------- THE CONSUMER PRICE INDEX -------------- ¶2. The official Consumer Price Index (CPI) was 0.4 percent higher in February 2006 than in January 2006, well below the Central Bank's (BCRA) consensus forecast of 0.9 percent. February inflation brought 12-month inflation to 11.5 percent. Prices of Goods increased 0.5 percent and Prices of Services increased 0.3 percent in February. Prices of goods that change depending on the season decreased a monthly 1.1 percent, regulated prices remained unchanged and the rest, which constitutes "core inflation," increased 0.7 percent in February. In other words, seasonal price declines in February overshadowed a continued rise in core inflation during the same month. Core inflation was 13.1 percent between February 2005 and �A;February 2006. The official CPI measures inflation only in the Greater Buenos Aires urban area. ¶3. Food and Beverages, and Medical and Health Care Services were the two CPI components with the highest monthly price rise in February, 1.0 percent, even though the GOA had launched price control measures for food, beverages and medicines. These items were followed by Housing Equipment and Maintenance, whose prices increased 0.8 percent. Education was the CPI component that increased the most between February 2005 and February 2006, posting a 16.1 percent increase. It was followed by Food and Beverages, which rose 15.0 percent, and Clothing, which increased 12.2 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 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 February, the poverty line was ARP 848.92 (USD 277) and the destitution line was ARP 393.02 (USD 128). 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 grew 0.6 percent in February, and rose 11.6 percent in the February 2005 - February 2006 period. The peso value of the destitution line increased 1.1 percent in February, and rose 14.2 percent in the February 2005- February 2006 period. ¶6. The percentage of people living below the poverty line was 38.5 percent in the 28 most important urban areas of Argentina in the first half of 2005. The percentage of the poor was 40.2 in the second half of 2004, and 44.3 percent in the first half of 2004. The percentage of people living below the destitution line was 13.6 percent in the 28 most important urban areas in the first half of 2005. The percentage of the destitute was 15.0 in the second half of 2004, and 17.0 percent in the first half of 2004. INDEC will release an update on poverty in Argentina on March 20 wherein the poverty and destitution levels are expected to decline. -------------- AVERAGE NOMINAL SALARIES -------------- ¶7. INDEC estimated that average nominal salaries increased 1.7 percent in January 2006 over December ¶2005. Inflation was 1.3 percent during that period. The average nominal salary increase in January was due to increases of 1.5, 4.1 and 0.6 percent in formal private sector, informal private sector and public sector salaries, respectively. Public sector salaries mentioned here include salaries of federal and provincial employees. Informal private sector salaries increased at a higher rate as the demand for labor increased and informal private sector salaries began to catch up with earlier increases in formal private sector salaries. ¶8. Average nominal salaries grew by 18.0 percent between January 2005 and January 2006. This growth was due to increases of 21.2, 16.0 and 11.8 percent in formal private sector, informal private sector and public sector salaries, respectively. Inflation in the same period was 12.1 percent. Therefore, the purchasing power of the average salaried worker in January 2006 was on average 5.3 percent higher than it was in January 2005. However, it was only formal private sector workers who posted a significant 8.2 percent gain in real salaries. -------------- WHOLESALE PRICE INDEXES -------------- ¶9. The Wholesale Price Index (IPIM) increased 1.4 percent during February 2006, bringing the total IPIM increase since February 2005 to 13.5 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 1.4 percent increase in February was due to a 3.3 percent increase in Primary Product prices and a 0.6 percent increase in Manufactured Goods. The increase in Primary Products is largely the result of a 4.7 percent increase in Oil and Gas prices. Electric Power prices increased 1.1 percent. Import prices increased 1.4 percent. ¶10. The Wholesale Basic Prices Index (IPIB) has the same coverage as the IPIM, except that it excludes taxes. The IPIB increased 1.4 percent in February, bringing the total IPIB increase since February 2005 to 14.2 percent. The 1.4 percent increase in February was due to a 3.3 percent increase in Primary Product prices and a 0.7 percent increase in Manufactured Goods. Electric Power prices increased 1.1 percent. Import prices increased 1.4 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 1.3 percent in February 2006, bringing the total IPP increase since February 2005 to 14.6 percent. Primary Products increased 3.3 percent and Manufactured Goods increased 0.6 percent. Electric Power prices increased 1.1 percent. -------------- CONSTRUCTION COSTS -------------- ¶12. The INDEC index measuring private housing construction costs in Greater Buenos Aires increased 1.0 percent in February 2006. These costs were 19.0 percent higher than in February 2005. The February increase is the result of a 1.2 percent increase in materials, 0.8 percent rise in labor costs, and a 0.7 percent increase in other construction costs. Wages of salaried employees working for the sector increased 0.9 percent and payments to the self-employed grew 0.8 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 February, CPI inflation is expected to be 1.2 percent in March, and 12.9 percent in 2006. Some analysts believe that this rate could be even higher, given the unexpectedly high increase in beef prices during the first part of the month. ¶14. To see more Buenos Aires reporting, visit our classified website at: http://www.state.sgov.gov/p/wha/buenosaires GUTIERREZ