Economy
The Central Bank of Venezuela's monthly report on inflation highlighted that in February 2010 prices climbed 1.6 percent, the lowest increase in the last 11 months. However, there are no reasons to celebrate.

The core inflation rate -an indicator used by the Central Bank of Venezuela (BCV) to clear the effects of price controls- makes it clear that inflation has been artificially curbed and consumers should expect significant increases in the next few months.

In February, the core inflation rate climbed 2.2 percent and in the first two months of the year it rose 4.3 percent, while the National Consumer Price Index, thanks to the temporary effect of price controls, only increased by 3.3 percent.

In January and February, food prices soared 1.9 percent, but the indicator that shows inflation in processed food items, which are free of controls, showed a significant increase of 5.4 percent.

Orlando Ochoa, an economist and professor with the Andrés Bello Catholic University (UCAB), said that "in an economy with major distortions such as Venezuela's, the core inflation rate is the best index, and it clearly shows that inflation has been artificially curbed by price controls."

When the prices set by the government do not cover costs and do not allow companies to make profits, businesses stop producing those items and shortage emerges.

To avoid this cycle, the government has started to announce important increases in prices of basic items, which will affect the inflation rate in March.

Although consumption is falling and demand is losing ground, prices have been boosted by the devaluation of the Venezuelan bolivar and a sharp drop in the supply of products.

As a result of devaluation, essentials such as food and medicines, which represent an important part of people's expenditures, will be imported in the future with an exchange rate of VEB 2.6 per US dollar, that is, a 21 percent increase compared to the previous exchange rate of VEB 2,15 per USD.

The Executive branch of government considers that the exchange rate of USD 4.30 per USD for non-basic products will not have a major impact on inflation because those prices had been set according to the swap market.

The problem is that the BCV has failed to curb the parallel exchange rate and analysts claim that the increase in the price of basic products will promote an increase in the remaining products.

Orlando Ochoa says that "it is a very high inflation rate amid a recession that translated into a 5.8 fall of the GDP in the fourth quarter. One would expect that inflation will speed up as the government increases public spending in the coming months."

In the first two months of the year, prices showed significant increases in key areas.

For instance, the cost of health services grew 5.6 percent, transport soared 4.4 percent and products related to leisure and culture climbed 5.9 percent.

Translated by Gerardo Cárdenas

Víctor Salmerón
EL UNIVERSAL