|08CARACAS956||2008-07-09 19:54:00||UNCLASSIFIED//FOR OFFICIAL USE ONLY||Embassy Caracas|
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UNCLAS CARACAS 000956
1. (U) According to the national consumer price index
(CPI-N) compiled by the Central Bank and the National
Statistics Institute, inflation for the month of June was 2.4
percent and reached 15.1 percent for the first half of 2008.
Annualized inflation (June 2006 to June 2007) topped 32
percent in Caracas. (Note: The CPI-N is a new measure; for
historical comparisons before January 2008, the Caracas CPI
must be used (ref A). End note.) Food prices continue to be
a leading driver of inflation: inflation in the food and
non-alcoholic beverages category was 19.3 percent for the
first half of 2008 and reached an astounding 49.6 percent in
Caracas over the last 12 months. Other leading drivers of
inflation were restaurants and hotels (23.1 percent in the
first half of 2008), transportation (17.5 percent), and
health (16.6 percent).
2. (U) Inflation has worsened in 2008 despite BRV attempts
to reduce it with a more restrictive monetary policy and by
controlling the parallel foreign exchange rate (ref B and C).
These measures have certainly slowed the growth in demand:
as one economist pointed out, wealthier Venezuelans (and
foreigners) who have the primary part of their savings (or
income) in dollars have seen effective local prices rise 150
percent (i.e., what used to cost the equivalent of USD 1 now
costs the equivalent of USD 2.5) from November 2007 through
June 2008, taking into account inflation and the fall in the
parallel rate. Nevertheless, the government's measures have
not yet slowed inflation for several reasons. Inflationary
expectations have been fueled by President Chavez' recent
announcements of 30 percent hikes in the minimum wage, in
most public-sector salaries, and in military salaries; there
is also a widely held expectation that fiscal spending will
increase in the run-up to the November regional elections.
Other reasons the BRV's measures have not slowed inflation to
date include poor incentives to invest in increased local
production and the BRV's intermittent raising of prices of
price-controlled goods (or, in some cases, lifting the
controls altogether) to reduce shortages.
3. (SBU) Comment: As noted in refs B and D, inflation is a
key political issue given the fact that many Venezuelans, and
especially poor Venezuelans (i.e., Chavez' political base),
are feeling their real purchasing power start to decline.
Food prices are of special concern to the BRV given the
importance of food in the consumption basket of poor
Venezuelans. President Chavez and his cabinet, including new
Minister of Finance Ali Rodriguez, have claimed that
increasing domestic food production is a top priority, but to
date BRV policies have certainly failed in containing food
prices. End comment.