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Moderation in inflation masks lingering pass through of currency
depreciation to domestic prices
Consumer prices rose 2.3% in October, which was down from the 4.5% spike
registered in September. As a result, the annual inflation rate rose from
28.2% in September to 29.9% - the highest rate since January 1999. Food
and non-alcoholic drinks, recreation and culture along with household
goods prices provided the lion share of the October increase. The only
category to undergo a decline in prices was the communications sector,
where prices dropped 0.1%. The Central Bank intervention to stabilize the
currency and a lack of domestic economic activity has averted a more
pronounced pick up in headline inflation. Wholesale price developments
indicate that inflationary pressures remain present and that the current
moderation in consumer prices may be resulting from retailers’ inability
to pass through higher prices to consumers amid the current recessionary
environment. In fact, throughout the year, wholesale price increases have
well outpaced consumer price hikes. In October, wholesale prices rose
3.2%, which was down from a 5.0% pickup in September. The annual wholesale
price increase rose from 46.5% in September to 51.4% in October. Even so,
participants do not expect any significant inflationary increase through
the end of the year. The carryover of low economic activity into next year
and continued Central Bank intervention to stabilize the currency is
likely to keep inflation at bay. In fact, annual inflation is expected to
moderate further.
Government acknowledges likelihood of
deeper recession
Following only a month upon its announcement to lower this year’s forecast
to a range of 3.5% to 4.0% contraction, the government decided to cut its
projection further to range of 4.8% to 5.0%, as political upheaval
threatens to undermine economic activity further. The government
anticipates that the downturn in economic activity moderated in the third
quarter to 3.9% compared to the same quarter last year from 9.9% in the
second quarter. Despite the improvement, however, the 7.1% contraction in
the first half of this year is likely to drag down the annual growth rate.
The government remains optimistic that higher oil prices and fiscal reform
measures will help kick-start the economy next year with economic activity
anticipated to rise to 3.7%. Participants believe the government remains
too optimistic about growth prospects. In fact, even though the recession
is expected to moderate, the downturn in the second quarter is anticipated
to be deeper than the government foresees with economic activity dropping
in the third and fourth quarter. Growth is seen as remaining subdued next
year with recession lingering into the first quarter and recovering slowly
in the remainder of the year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Venezuela. For more details please click here.
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