Wednesday, November 01, 2006

"Consumption booms" are a bitch 

There is bad news that is bad news. Then there is bad news that is really good news. Such is the case with the news out of Venezuela today that inflation this year is up. Here is the report from Bloomberg with key highlighting courtesy yours truly:

Venezuela Inflation Accelerates to Fastest in Year (Update3)

By Guillermo Parra-Bernal

Nov. 1 (Bloomberg) -- Venezuela's annual inflation rate rose to its highest in a year as shortages of consumer goods coupled with rising household income push prices up.

Consumer prices in the 12 months through October rose 15.5 percent, the fastest pace since October 2005, the central bank said in a statement on its Web site. The October inflation rate rose 0.74 percent, the slowest pace in six months, after increasing 1.9 percent the previous month, the statement said.

Inflation in South America's third-biggest economy may reach about 17 percent in 2006 as the start of the holiday season and year-end bonuses fuel demand for consumer goods, said Goldman Sachs Group Inc.'s Alberto Ramos. Banks including Citigroup Inc. say the government may have to ease foreign exchange currency controls to prevent inflation from crawling up further as shortages of consumer goods worsen.

``The economy is out of sync, it's growing above trend,'' said Ramos, a senior Latin America economist with Goldman Sachs Group Inc. in New York. ``There is a consumption boom in Venezuela and that, in the face of shortages and currency trading restrictions, feeds into prices.''
President Hugo Chavez boosted government spending 67 percent in the first seven months, increased cash handouts to low-income households and raised the minimum wage as revenue surged from record oil income. Central bank director Domingo Maza Zavala said Oct. 20 that higher spending is behind the recent surge in consumer prices.

`Good News'

A third year of economic growth above 9 percent and the inability of local companies to cope with soaring orders are fanning inflation, Ramos said.

While industrial output grew 10 percent in the past year, retail sales rose about a third in the same period, Caracas- based brokerage Solfin Sociedad de Corretaje de Valores said in a report released yesterday.
The monthly increase was smaller than the 1 percent forecast in a Bloomberg survey of five economists. Seven out of the 13 categories surveyed by the bank showed smaller price increases in October, the bank said.

``We are taking the fight to these demons unleashed by inflation, economic recessions, joblessness,'' Chavez said at a ceremony outside Caracas. ``Our policies are working. This is good news.''

CPI, Currency

Venezuela has the fastest annual inflation rate in Latin America and consumer prices in the world's fifth-largest oil exporter have risen by 10 percent or more every year since 1985.

The central bank expects inflation to end the year around 16 percent and slow to ``somewhere between'' 10 percent and 12 percent next year.

The bolivar traded today at about 2,960 per dollar in street trading, near its weakest level in a year, signaling companies and people not authorized by the government to buy U.S. currency at the official exchange rate are doing so from street traders. The official exchange rate is 2,147.3 per dollar.

To ease the shortage of dollars and goods, the government plans to authorize a 25 percent increase in dollar sales this year to fund imports for manufacturers, builders and retailers, Foreign Exchange Commission President Manuel Barroso said Oct. 28.


Medicine prices jumped an average 36 percent in the first nine months as the government, which bars free trading of the U.S. currency, delayed additional dollar sales.

``The government miscalculated and that's why inflation won ground,'' Edgar Salas Jimenez, president of Venezuela's Pharmaceutical Federation, said in an interview. ``Policy makers never imagined such reaction by consumers.''

Education prices rose 0.4 percent, compared with 9.7 percent in September. Foods and beverages fell 0.1 percent.

Prices for alcoholic beverages and tobacco rose 3.8 percent in October compared with a 0.5 percent increase in September. Residential rents as well as the cost of clothing and processed foods posted faster increases in October.

Core, Bonuses

Core inflation, or a measure of inflation excluding some of the consumer price index's most volatile prices, slowed to 1.6 percent in October from 2 percent in September, the bank said.

Government-controlled prices, which account for about half the CPI, rose 1.1 percent last month compared with 2.5 percent in September. Inflation for a basket of non-regulated prices slowed to 0.4 percent from 1.4 percent in September, the bank said.

Banks such as Goldman Sachs and Banco Federal CA may boost their year-end inflation forecasts due to rising government expenditures and factory capacity constraints.

Today, Chavez, who faces re-election Dec. 3, will move up the payment of 6.5 trillion bolivars ($3 billion) in year-end bonuses to civil servants. The early payout ``will trigger an even bigger consumption boom'' that may spark faster inflation, said Miguel Carpio, chief economist with Banco Federal in a phone interview from Caracas.

Textile, food processing and plastics manufacturers, encouraged by Chavez's efforts to make Venezuela's economy less dependent on oil, have ramped up the country's capacity utilization rate to 92 percent, Light Industry and Commerce Minister Maria Cristina Iglesias said last month.

Now, there is really nothing good to be said for inflation. It would be better if it were lower. But keep in mind, inflation, or lack of it, isn't what determines peoples standard of living. Economic growth is and Venezuela, as pointed out in the article, has that in abundance.

In fact as we have seen previously per capita real consumption is up significantly and in 2005 reached levels not seen since the 1980s. With huge wage increases (up to 100% increases in some cases), massive social spending, and another 9% growth Venezuelans might approach real income levels not seen since the 1970s. No wonder 70% of Venezuelans say their own personal situation is good and they expect it to keep getting better (interestingly, a recent Zogby found that about 70% of Venezuelans are content with their personal situation prompting some of the opposition crazies to claim that poll can't be right, never mind that Consultores 21 found the same thing a month before).

The end result? I think if the side effect of having an economic boom is having a little inflation I think most Venezuelans will take that deal any day. After all in the mid 90s when the opposition they had 100% inflation and an stagnant economy at the same time! Thank god for Chaveznomic!


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