Chavez battles re-election hurdle: Venezuela inflation

CARACAS Tue Apr 17, 2012 12:29am EDT

Venezuelan President Hugo Chavez stands at the People's balcony at Miraflores Palace in Caracas April 13, 2012. REUTERS/Carlos Garcia Rawlins

Venezuelan President Hugo Chavez stands at the People's balcony at Miraflores Palace in Caracas April 13, 2012.

Credit: Reuters/Carlos Garcia Rawlins

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CARACAS (Reuters) - Venezuelan President Hugo Chavez is so determined to contain one of the world's highest inflation rates in an election year that his price control officials are sticking signs outside stores to enforce compliance.

The red-yellow-green traffic light notices tell shoppers whether a store is obeying new price caps.

Businesses that don't comply face fines, temporary closure or outright expropriation by his socialist government.

The initial freezing of prices of 19 key goods in December has begun to kick in: Consumer prices rose 3.5 percent in the first three months of 2012, the lowest quarterly rate since the oil exporting country introduced a new index four years ago.

But most economists believe Chavez's efforts to contain inflation will have only short-term results because increased public spending in the run-up to the October 7 presidential election is bound to stoke prices again in the oil-producing OPEC nation.

The analysts say price controls will only distort a highly regulated economy further and speed up inflation in the long run as the cheaper regulated goods become scarce and producers compensate their losses by raising prices on unregulated goods.

"What's happening is they are containing inflation but not really attacking the causes of inflation. In fact, many of the causes are being deepened," said economist Pedro Palma of the Caracas-based consultancy Ecoanalitica.

Chavez, who has nationalized great swathes of the Venezuelan economy, maintains that speculators and hoarders are fueling inflation, and he accuses his political opponents of trying to disrupt the economy to undermine his government.

"We will continue monitoring clothing, cars, food above all, medicine ... to reduce speculation to zero because it is one of the main factors causing inflation," he vowed recently. "This is just the start."

Despite suffering from an unspecified cancer, for which he is having radiation treatment in Cuba, Chavez is seeking another six-year term in October in the toughest election battle he has faced in 13 years in office.

Amid doubts over his health, Chavez's opposition is taking him to task for the high cost of living, a major gripe with voters, as well as over a rising crime rate that has made Venezuelan cities unsafe.

CASH INJECTION

Chavez has made clear that his election strategy is to put more money in the pockets of Venezuelans by stepping up an array of social programs that have redistributed income to the poor as part of his so-called socialist revolution.

The cash flow is expected to begin in the second quarter, and includes a 30 percent increase in the minimum wage that will be seen in paychecks in two stages, May and September.

His government plans to spend $26 billion on social programs for 2011-2012 and has expanded this year's national budget by 45 percent. Additional funding will come from new bond issues after the government eliminated the debt ceiling by decree in March.

Last year, Venezuela issued more sovereign paper than any other Latin American state - more than $17 billion - to fund housing projects, the import of food and medicine as well as non-essential consumer goods.

Financial analysts expect Venezuela to place at least another $15 billion in bonds on the capital markets this year.

The massive injection of funds is expected to heat up the economy and speed up inflation, putting further stress on a weakened private sector.

Venezuelan business leaders criticize the government for suffocating the economy with regulations like price controls that reduce productivity and increase the country's dependence on imported goods.

"Some producers are operating almost at a loss," complained Moises Bittan of Fedecamaras, Venezuela's main business lobby.

Venezuela has the most regulated economy in Latin America after communist Cuba and inflation rates that are four or five times higher than the region's average, according to Jose Manuel Puentes of the IESA business school in Caracas.

The official inflation target for this year is in the 22-25 percent range, but market players expect it to be closer to last year's 27.2 percent.

The government's dilemma is that the more it regulates the economy, the worse inflation will get, said Puentes.

(Additional reporting by Marianna Parraga; Editing by Anthony Boadle and Doina Chiacu)

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