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Analysis

Venezuela’s Inflation Forecast Revised to 27.5%-30% y/y

By Juan Lorenzo Maldonado

The Caracas CPI for October was in line with expectations (consensus, 1.4% m/m; RGE, 1.6% m/m) at 1.5% m/m, reaching 27.6% y/y and summing to 23.7% year-to-date. Food prices recovered from last month’s lows, printing a 1.9% m/m rise, and alcoholic beverages printed a 2.4% m/m increase. Transport prices and other goods and services pushed on the upside by 1.4% m/m and 2.08% m/m, respectively. Rent and health-care costs also helped to the upside. On the downside, education services dropped to 0.8% m/m from the yearly high of 11.88% m/m in September due to seasonal effects. Apparel soothed to 1.77% m/m from 2.3% m/m in September, a dynamic mirrored by restaurants and hotels and home appliances. Core inflation of the Caracas CPI remained high, gaining 1.6% m/m in October and printing a 29% y/y gain. Year-to-date, core inflation accumulated to 24.2%. With respect to the new National CPI, October’s inflation was also 1.5% m/m, which translated into 27.5% y/y and 23% year-to-date readings.

Figure 1: Venezuela’s Headline Inflation and Components (% m/m)

Source: Central Bank of Venezuela

In RGE’s view, inflation dynamics in Venezuela remain hazardous, as pressures on prices will probably resurface in upcoming months due to raising the price cap on corn flour and rice on November 8 (24% and 22% respectively) that will continue to pressure food prices up, inhibiting the CPI from relaxing much further this year. October’s inflation marks the end of five months of deceleration and coincides with the scarcity index increasing to 10.7% from 10.3% last month. However, government price controls, a stronger exchange rate and the economic recession appear to have contributed to slow inflation in H2 2010. Hence, we have revised our inflation forecast towards the 27.5%-30% y/y range for 2010 from the 30-35% y/y.

Figure 2: Venezuela’s Caracas CPI and Caracas Core CPI (% y/y)

Source: Central Bank of Venezuela

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