Peru - Economic Briefing October 2003

Economy Adjusts to More Moderate Output Growth (continued)

Consumer prices spike in September
In September, consumer prices rose 0.56%. The rise was well above market expectations of 0.30%, according to last month’s Consensus. Moreover, the September reading represented the highest monthly increase since March and ends a string of five months with either declining or virtually unchanged prices. Rising food and beverages prices constituted the main force behind the September hike, supported further by higher transport and communication prices. Prices for shoes and clothing, on the other hand, dropped, mitigating the overall price increase.

Annual inflation rises slightly following on months of declines
As a result of the September price spike, annual headline inflation rose to 2.0%. In August, the annual inflation rate had dropped to 1.9%, the lowest rate in the year and markedly down from the 3.4% observed in March. The index for core inflation, which excludes the more volatile items such as fresh fruits and vegetables and fuels, which had propelled the September price spike, remained virtually unchanged in September. As a consequence, the annual core inflation rate dropped from 1.4% in August to just 0.7% in September.

Central Bank sees inflation at lower end of target range
If the current consumer price developments are sustained, Peru could once more enter deflationary territory, which had plagued the country in the first half 2002. However, Central Bank and Consensus Forecast participants alike are confident that Peru will stay clear from any deflationary bout in the near future. On 1 October, Central Bank President Javier Silva Ruete said that inflation will end the year within the target range set out by monetary authorities. However, Silva Ruete acknowledged that the actual annual rate is likely to be very close to the lower end of the 1% tolerance margin of the central 2.5% target rate and below the current Central Bank estimate of 1.5%. The Consensus has year-end inflation well above this latest Central Bank estimate, at 2.0%. An exact call is very difficult at these levels, since a small monthly price variation has a relatively large impact on the annual inflation rate.