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Viewing cable 06BUENOSAIRES1132, APRIL 2006 INFLATION UPDATE AND PREDICTIONS

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Reference ID Created Released Classification Origin
06BUENOSAIRES1132 2006-05-17 18:17 2011-08-25 00:00 UNCLASSIFIED Embassy Buenos Aires
VZCZCXYZ0005
RR RUEHWEB

DE RUEHBU #1132/01 1371817
ZNR UUUUU ZZH
R 171817Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4581
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2176
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5538
RUEHMN/AMEMBASSY MONTEVIDEO 5567
RUEHSG/AMEMBASSY SANTIAGO 5142
RUEHBR/AMEMBASSY BRASILIA 5340
RUEHSO/AMCONSUL SAO PAULO 2897
RUEHRI/AMCONSUL RIO DE JANEIRO 1990
UNCLAS BUENOS AIRES 001132 
 
SIPDIS 
 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
PASS USTR FOR LESLIE YANG 
TREASURY FOR RAMIN TOLOUI AND CHRIS KUSHLIS AND OCC 
FOR CARLOS HERNANDEZ 
USDOC FOR ALEXANDER PREACHER 
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY 
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ETRD ALOW AR
SUBJECT: APRIL 2006 INFLATION UPDATE AND PREDICTIONS 
 
 
------- 
SUMMARY 
------- 
 
1.  The Consumer Price Index (CPI) rose 1.0 percent in 
April, bringing the 12-month inflation rate to 11.7 
percent.  Average nominal salaries increased 0.9 
percent in March and the purchasing power of salaried 
workers in March was 5.3 percent higher than in March 
2005.  The poverty rate fell to 33.8 percent in the 
second half of 2005, down from 38.5 percent in the 
first half, while the destitution level declined to 
12.2 percent from 13.6 percent.  The Central Bank's 
survey of market expectations projects CPI inflation 
to be 0.8 percent in May and 12.3 percent for all of 
2006.  The GOA's anti-inflation policy identifies 
relative price adjustments and profiteering as the 
main sources of inflation and attacks them with price 
and cost controls.  Research from many reputable 
sources indicates, however, that Argentine inflation 
is mainly the result of monetary and fiscal factors, 
indicating that the GOA should focus on macroeconomic 
remedies that have historically been more effective in 
fighting inflation.  End Summary. 
 
------------------------ 
THE CONSUMER PRICE INDEX 
------------------------ 
 
2.  The official Consumer Price Index (CPI) was 1.0 
percent higher in April 2006 than in March 2006, above 
the 0.8 percent predicted by the Central Bank's (BCRA) 
consensus forecast.  April inflation brought 12-month 
inflation to 11.7 percent.  Prices of Goods increased 
1.0 percent and Prices of Services increased 0.9 
percent in April.  Prices of seasonal goods increased 
by 2.5 percent, regulated prices increased 0.2 
percent, and the rest, which constitutes "core 
inflation," increased 0.9 percent in April.  Core 
inflation was 12.7 percent between April 2005 and 
April 2006.  The official CPI measures inflation only 
in the Greater Buenos Aires urban area. 
 
3.  Clothing, Entertainment, and Housing and Basic 
Housing Services were the three CPI components with 
the highest monthly price rises in April, increasing 
5.5 percent, 1.5 percent and 1.0 percent, 
respectively.  Education was the CPI component that 
increased the most between April 2005 and April 2006, 
posting a 19 percent increase.  Education was followed 
by Clothing, which rose 14.8 percent, and Food and 
Beverages, which increased 13.8 percent. 
 
TABLE I 
CONSUMER PRICE INDEX (1999 = 100) 
 
          CPI PCT CHG       CORE INFLATION 
YEAR         PREV YR             PCT CH PREV YR 
 
2001          -1.5                n.a. 
2002          41.0                n.a. 
2003           3.7                n.a. 
2004           6.1                 6.4 
2005          12.3                14.2 
 
           CPI PCT CHG      CORE INFLATION 
             PREV MO             PCT CH PREV MO 
 
2005 
JAN            1.5                 1.1 
FEB            1.0                 1.3 
MAR            1.5                 2.2 
APR            0.5                 0.8 
MAY            0.6                 0.6 
JUN            0.9                 1.1 
JUL            1.0                 1.0 
AUG            0.4                 0.9 
SEP            1.2                 0.9 
OCT            0.8                 0.7 
NOV            1.2                 1.4 
DEC            1.1                 1.4 
 
2006 
JAN            1.3                 0.7 
FEB            0.4                 0.7 
MAR            1.2                 1.7 
APR            1.0                 0.9 
 
Source: National Bureau of Statistics and Census 
(INDEC). 
 
------------------------------ 
POVERTY AND DESTITUTION LEVELS 
------------------------------ 
 
4.  INDEC publishes a monthly estimate of the value of 
a "total consumption basket" and a "food consumption 
basket."  These baskets are based on estimates of the 
minimum nutritional requirements and other consumption 
habits of people of different ages.  These estimates 
determine the official poverty line and the official 
destitution line, respectively.  For a family of four 
in April, the poverty line was ARP 857.60 (USD 280) 
and the destitution line was 
ARP 397.03 (USD 130).  A family of four is defined as 
a man and a woman in their thirties, an eight-year-old 
girl and a five-year-old boy. 
 
5.  The peso value of the poverty line decreased 0.3 
percent in April, and rose 11 percent in the April 
2005 - April 2006 period.  The peso value of the 
destitution line decreased 0.7 percent in April, and 
rose 12.5 percent in the April 2005-April 2006 period. 
 
6.  The percentage of people living below the poverty 
line was 33.8 percent in the 28 most important urban 
areas of Argentina in the second half of 2005.  The 
percentage of the poor was 38.5 in the first half of 
2005, and 40.2 percent in the second half of 2004. 
The percentage of people living below the destitution 
line was 12.2 percent in the 28 most important urban 
areas in the second half of 2005.  The percentage of 
the destitute was 13.8 percent in the first half of 
2005, and 15.0 percent in the second half of 2004. 
 
------------------------ 
AVERAGE NOMINAL SALARIES 
------------------------ 
 
7.  INDEC estimated that average nominal salaries 
increased 0.85 percent in March 2006 over February 
2006.  Inflation was 1.2 percent during that period. 
The average nominal salary increase in March was due 
to increases of 1.2 and 0.7 in formal and informal 
private sector salaries, respectively, while public 
sector salaries were unchanged.  Public sector 
salaries include salaries of both federal and 
provincial employees. 
 
8.  Average nominal salaries grew by 17.0 percent 
between March 2005 and March 2006.  This growth was 
due to increases of 21.0, 17.6 and 7.1 percent in 
formal private sector, informal private sector and 
public sector salaries, respectively.  Inflation in 
the same period was 11.1 percent.  Therefore, the 
purchasing power of the average salaried worker in 
March 2006 was on average 5.3 percent higher than it 
was in March 2005.  Both formal and informal private 
sector salaries had significant gains in purchasing 
power of 8.9 and 5.8 percent, respectively.  However, 
public sector salaries experienced a 3.6 percent 
decline. 
 
----------------------- 
WHOLESALE PRICE INDEXES 
----------------------- 
 
9.  The Wholesale Price Index (IPIM) increased 1.5 
percent during April 2006, bringing the total IPIM 
increase since April 2005 to 11.0 percent.  This index 
measures the price changes of national products 
(including Primary Products and Manufactured Goods and 
Electric Power) and imports sold in the domestic 
market.  The IPIM also includes taxes.  The 1.5 
percent increase in April was due to a 4.1 percent 
increase in Primary Product prices and a 0.7 percent 
increase in Manufactured Goods.  The increase in 
Primary Products was largely the result of a 9.0 
percent increase in Oil and Gas prices, and a 6.6 
percent increase in Fish prices.  Electric Power 
prices did not change.  Import prices increased 0.6 
percent. 
 
10.  The Wholesale Basic Prices Index (IPIB) has the 
same coverage as the IPIM, except that it excludes 
taxes.  The IPIB increased 1.6 percent in April, 
bringing the total IPIB increase since April 2005 to 
11.5 percent.  The 1.6 percent increase in April was 
due to a 3.9 percent increase in Primary Product 
prices and a 0.7 percent increase in Manufactured 
Goods.  Electric Power prices did not change.  Import 
prices increased 0.6 percent. 
 
11.  The prices for the sectors measured in the IPIM 
and IPIB are weighted using the corresponding value of 
product net of exports.  INDEC has devised another 
index, the Basic Prices to Producers Index (IPP), 
whose weights are calculated considering sales in the 
internal market as much as sales to the external 
market and excluding imports and taxes.  The IPP 
increased 1.7 percent in April 2006, bringing the 
total IPP increase since April 2005 to 11.8 percent. 
Primary Products increased 4.1 percent and 
Manufactured Goods increased 0.7 percent.  Electric 
Power prices did not change. 
 
------------------ 
CONSTRUCTION COSTS 
------------------ 
 
12.  The INDEC index measuring private housing 
construction costs in Greater Buenos Aires increased 
1.3 percent in April.  These costs were 15.7 percent 
higher than in April 2005.  The April increase is the 
result of a 1.6 percent increase in materials, a 1.0 
percent rise in labor costs, and a 0.3 percent 
increase in other construction costs.  Wages of 
salaried employees working for the sector increased 
0.8 percent and payments to the self-employed grew 1.6 
percent.  Professional fees are not included among the 
labor costs considered by INDEC in the construction 
sector. 
 
------------------------------ 
INFLATION PREDICTIONS FOR 2006 
------------------------------ 
 
13.  The GOA's national budget includes a 9.1 percent 
inflation forecast for 2006.  The BCRA monetary 
program for 2006 announced on December 29, 2005, 
established an inflation target of between 8-11 
percent for 2006.  According to the BCRA's last survey 
of market expectations published on April, CPI 
inflation is expected to be 0.8 percent in May, and 
12.3 percent in 2006, the same rate as for 2005. 
 
------- 
COMMENT 
------- 
 
14.  The GOA's decision to focus its anti-inflation 
policy on widespread price restraint agreements, price 
controls, cost controls and export bans, reflect the 
GOA's view that inflation in Argentina is due to 
microeconomic problems.  Both the GOA and the Central 
Bank (BCRA) argue that the major causes of inflation 
is relative price adjustments from the 2002-2003 
devaluation of the peso, and profiteering, primarily 
by retailers, abusing their market power. 
 
15.  Research from many reputable sources indicates, 
however, that inflation in the Argentine economy is 
mainly the result of monetary and fiscal factors.  For 
example, Deloitte Argentina Chief of Economic Analysis 
Luis Secco demonstrated recently that price increases 
have been generalized since early 2005, with price 
increases in 75 percent of all CPI components.  If 
this were the result of relative price adjustments, as 
the BCRA and GOA have argued, we should be seeing some 
prices increasing sporadically while many others 
remain stable.  Secco also showed that the ratio 
between consumer prices and wholesale manufacturing 
prices is well below pre-devaluation levels, so price 
increases also are not the result of profiteering by 
retailers.  This research indicates that the GOA 
should focus on macroeconomic remedies that have 
historically been more effective in fighting inflation 
than price and cost controls. 
 
16.  To see more Buenos Aires reporting, visit our 
classified website at: 
http://www.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ