DID YOU SAY "DEFLATION"?

According to the Vázquez administration, until September there was no inflation. There were abusing business, rising international prices or there was no record of a “chaotic” rise of prices (an astonishing and innovative definition of inflation). Anyhow, albeit there was no inflation —according to them— the Minister of Economics repeated like a mantra that “the inflation is under control”. Until September, when the government showed up with a pack of seven decisions to control what was already under control and didn't even exist.

Conversely, now they say there was “deflation” in October. And some in the media echoed that expression.

Well, there was no “deflation” in October. Deflation is a decrease in the general price level over a period, as opposed to inflation. There was no decrease in the general price level, but just a decrease of the price index in October. Inflation is still among us.

What the government did was never directed to attack the root causes of inflation (an expanding aggregate demand, leaded by government spending) but just to control the price index to avoid the 10% threshold, which would trigger an unstoppable spiral.

Strictly speaking, what the government did was to take into account which items had a greatier impact on the index and, at the same time, the government was able to force their prices down. After that, the administration subsidized certain prices, negotiated others (so futile as the prices control policies), reduced those prices officially administered (health institutions, electricity, running water and telephone bills) and promised ANCAP (the oil and fuel monopoly) to decrease the tax on fuel for every new rise of the oil international price in the same percentage, so as to let the company stop losing money due to retail frozen prices.

All of that was directed to the index, the crude number, not inflation.

So much inflation is alive that we can track it by simply analying some of the index components:

“Food and beverages” had a 2.28% increase. Inside this component, we have —for instance— “Bread and cereals” (+2.32%), “Meats and derivatives” (+2.43%), “Vegetables, legumes and tubers” (+5.12%), “Fruits” (+7.46%), “Oils and fats” (+4.11%)... and so on. The only sub-component which actually showed a decrease was “Sugar, coffee, tea, yerba and cacao” (-0.25%). During 2007, inflation for “Food and beverages” has amounted 18.71% and the cummulative index variation for the last 12 months, a terrifying 20.24%. Guess who spends a greater amount of income on food and beverages? Yes, those who earn the less. For them, there was no index “deflation” and they're still being punished by the “under control” and “non existent” inflation.

The components which experienced reductions were “Housing” (-0,5%) —because of the reduction on the public monopolies prices, but not because of rents, which increased 1.16%—, “Health care” (-3.85%) —because of the decreed reduction on the health institutions bills— and “Transportation and telecommunications” (-3.02%) —because of the subsidized bus ticket in Montevideo.

Definitely, the government, index in hand, proceeded to push down the prices of the components which had the possibility to affect in order to reduce the index number. But inflation is still alive. So much that the Monetary Policy Committee had to rise the so called “Monetary Policy Rate” —the “call” rate used as referent for the monetary program— from 7% to 7.25%. It's reasonable: the “anti-inflationary” measures, because of their expansive nature, actually are fueling inflation. Therefore, there are no choices but to concentrate on the monetary tools, forcing more restrictive measures —hence the added fall of the exchange rate, affecting the exporters.

In a few words: there's no deflation, inflation keeps walking and the weaker —the poor and the lower middle class— keep on being punished thanks to an administation self-styled as their only defender.