Peru:  Deflationary Bout as Economy Continues Mired in Recession (continued)

Consumer prices drop again prompting a steep drop in annual inflation.  In August, consumer prices dropped by 0.30%, the third deflationary month in the past five months.  Moreover, the core inflation index, which excludes the more volatile items and thus reduces statistical noise, also dropped by 0.05%, which represented the third consecutive monthly decline and was a clear reflection of sluggish domestic demand.  The broad scope of price declines corroborated this hypothesis.  In August, most price categories observed by the National Statistical Institute (INE) registered declines, led by housing and electricity, followed by transport and communications, food and beverages, as well as furniture and household equipment.  As a result of the continued downward pressures on prices, headline inflation dropped from an already low 2.2% in July to just 1.4% and annual core inflation fell from 2.2% in July to 1.8%.  Next year, the anticipated pickup in domestic demand should exert more pressure on prices and inflation will rise again, according to this month’s Consensus Forecast.

Decline in domestic demand prompts improvement in external balances.  Not surprisingly, the recession also left its mark on the country’s external balances.  In the second quarter, the current account deficit fell to US$ 253 million from US$ 476 million in the first quarter this year and US$ 518 million in the second quarter 2000.  The bulk of the lower current account deficit is due to an improvement in the trade balance, which was barely negative in the second quarter this year compared to a US$ 155 million deficit for the same period last year.  The improvement in the trade balance is due to both higher exports and lower imports in the wake of declining domestic demand.  The annual current account deficit dropped to US$ 1.4 billion in the second quarter but the Consensus expects it to rise towards the end of the year.  The US$ 359 million surplus in the capital account balance was more than sufficient to cover the small gap in the current account balance.  Thus, international reserves increased US$ 231 million in the second quarter, according to the balance of payments data. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.