From the Editors of VenEconomy

The Central Bank of Venezuela has announced that the Consumer Price Index for the Caracas Metropolitan Area (CPI-CMA) grew by 2.1% in June, the same as in May, bringing inflation for the first six months of 2009 to 12.4% versus 16.3% for the same period in 2008.

The good news is that inflation has been much lower than forecast, and the even better news is that food prices have been practically stationary, with an increase of 3.9% over the past six months versus the spectacular increase of 22.1% for the same period in 2008.

Even so, this happy state of affairs will be short lived, because the truth of the matter is that the news is bad. To begin with, according to the World Cost of Living Survey 2009 conducted by the multinational Mercer Consulting and published yesterday in London, out of the 143 countries in six continents analyzed, Caracas is among the 15 cities with the highest cost of living. Caracas has gone up 74 places since the 2008 survey to win the prize as the most expensive city in Latin America.

What is even more important is that the apparent stability of food prices seems to be coming to an end, if account is taken of the fact that:

• The world financial crisis triggered a downturn in the prices of raw materials, among them wheat, corn, beans, and other food items and inputs that Venezuela imports wholesale. But these prices have already bottomed out and have started to recover.
  
• Food prices always go down at the start of the year, only to rise with the rainy season at the beginning of the third quarter. This year the rains were late and, therefore, the increase in food prices has been postponed. But now the rainy season is here and with it the increase in many basic foodstuffs. For example, the upturn is already being felt in the prices of tomatoes and certain vegetables.
  
• With the drop in oil prices, the government is finding it increasingly difficult, not to say impossible, to maintain its policy of subsidizing the basic foodstuffs it distributes through the Mercal network and PDVAL. Already by the end of June, for example, the network had increased its prices for chicken, beef, margarine, vegetable oil, sugar, beans, and other products. The impact of this increase on the prices of basic basket food items in these networks that cater to the low-income groups will undoubtedly be felt in July.
  
• Added to that, inflation in Venezuela would have been higher had it not been for the fact that the official exchange rate has been frozen at Bs.F.2.15:$ for more than four years. But, also as a result of the drop in oil prices, Cadivi has found it impossible to continue meeting the demand for foreign currency. This has meant that importers have been forced to resort increasingly to the swap market, which has had an impact on the prices of practically the entire consumption basket compiled by the Central Bank. This inflationary impact in the food sector will become more acute in the second semester.

On top of all that, account should be taken of the fact that, in the last semester of the year, food prices post bigger increases than in the first, that there is the impact of the cost of uniforms and supplies for the new school year, and that everything goes up in price at Christmastime.

Bearing all this in mind, VenEconomy forecasts inflation for 2009 of more than 40%, way above the 31% posted in 2008 and even further removed from the 28% forecast by the government.

VenEconomy has been a leading provider of consultancy on financial, political and economic data in Venezuela since 1982.