San José, Costa Rica, since 1956

Central Bank Downplays Inflation Concerns

CENTRAL Bank president Francisco de Paula Gutiérrez has downplayed growing concerns over inflation and the increase in the prices of several products reported in recent months.

“We are not in the middle of an inflationary process that affects the whole of the economy,” Gutiérrez explained. “Instead, we are witnessing an increase in the prices of very specific products.”

After monitoring recent increases in prices of several commonly used goods and services, the Central Bank concluded the price increases, for the time being, are isolated and unrelated cases and not a sign of a widespread increase in inflation.

Inflation concerns have been sparked by recent increases in the monthly Consumer Price Index (CPI) – a measure of the average change over time in the prices paid by Costa Rican consumers for a market basket of basic goods and services.

IN the past five months, this index has registered a 7.02% increase in prices (TT, March 12). This figure is worrisome, analysts say, considering the country has been averaging 10% inflation a year during the last decade, and the Central Bank had targeted 9% inflation for this year (TT, Jan. 16).

However, the Central Bank’s primary inflation indicator, the Underlying Inflation Index – a more technical inflation measure used to evaluate inflationary trends excluding volatile products prone to sudden increases and sharp drops – remains on track, having grown only 4.44% over the last five months.

Essentially, this means the increase in the Consumer Price Index has been caused by increases in the price of oil and agricultural products, such as eggs, rice and potatoes, a worldwide shortage of steel (TT, Feb. 27, March 12), increases in electricity and, as of last week, water rate hikes.

These price increases have not, however, spread throughout the rest of the economy and are therefore not part of a larger inflation trend, Gutiérrez said. This week’s cab fare hike also is likely to result in increases in the price index.

EVEN if the CPI globally reports an increase in inflation, the prices of most products have not risen faster than the Central Bank projected. Other important variables, such as demand for credit and import growth, are also stable, according to Gutiérrez.

For the moment, the Bank is not overly concerned about inflation, he said.

However, it will keep a close eye on changes in prices over the coming months, and Gutiérrez said particular attention will be paid to the price of oil, which last week rose to $38 a barrel – near a 17-year high.

“What we’re interested in is the pace at which prices are increasing,” Gutiérrez said last week. “It doesn’t worry us if, as a result of the increases in the price of specific products reported during the first months, we are unable to meet the 9% inflation target we had expected between last December and next December.

“If what we see is an increase in the rate of inflation that begins to accelerate the growth of all prices, we’ll be forced to take corrective actions,” he warned.

IF inflation does become a threat, the Central Bank will attempt to curb it by restricting consumer demand for goods and services. According to Gutiérrez, this would entail restricting credit (by raising interest rates) and/or increasing the rate of the colón’s devaluation against the dollar.

Both measures would slow the economy’s growth, the Central Bank president said.

Félix Delgado, of economic consulting firm CEFSA, believes the fast increase in prices will most likely subside soon.

“The evidence does not suggest the trend in prices will continue,” he explained. “Prices will still show a strong increase in March as a result of the readjustment of water rates. This will affect the index this month, but won’t continue during the remainder of the year.

“The agriculture issues will be resolved,” he said. “The increase in the price of eggs and legumes is a short-term effect caused by weather conditions and other specific supply problems. Once these conditions subside, their prices will likely drop. The only conditions that could continue for a while longer is high oil prices.”

HOWEVER, Delgado warned, if prices continue to rise, they will likely result in higher salary increases when many private sector salaries are adjusted to counter inflation at the end of June. Higher salaries could result in higher actual inflation, he said.

Given what has happened during the first quarter of 2004, CEFSA believes the Central Bank’s 9% target is unrealistic.

“From the start, we considered the 9% target difficult to meet,” Delgado said.

“We’ll have to wait to see what will happen. CEFSA considers a figure of less than 10% is now almost impossible.”

Gutiérrez, however, said the Central Bank remains committed to keeping the rate of inflation at 9% in 2004 and will do what is necessary to make that happen.


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