Inflation roars back in Venezuela in April

By Saul Hudson

CARACAS (Reuters) - Venezuela's consumer prices jumped 1.4 percent in April, reigniting inflation after a brief respite as President Hugo Chavez's government struggles to tame the highest inflation in Latin America.

The stronger-than-expected jump followed a 0.7 percent fall in March, a break in the inflationary trend because Chavez cut the value added tax that month without addressing pressures which have caused shortages of food staples like milk and meat.

The April inflation result, reported by the central bank, was substantially above the median 0.95 percent CPI forecast increase expected by eight financial institutions surveyed by Reuters. Last year in April, prices rose 0.6 percent.

Inflation for the 12 months through April was 19.4 percent. The government's target for 2007 is 12 percent inflation but most economists predict consumer prices will rise at least 20 percent this year.

Chavez's spending on expanded social programs and policies to raise workers' wages and conditions are contributing to inflation, some economists say.

Late on Monday, to mark May Day, Chavez lifted the minimum wage 20 percent. He also ordered the working day to be gradually slashed to 6 hours in a move he said would force employers to create new jobs.

"The generous increases in the minimum wage in recent years allied with labor market restrictions that prevent employers from reducing the headcount and widespread price controls is increasing production costs and reducing profit margins," Goldman Sachs economist Alberto Ramos wrote on Tuesday in a research note.

"This is reducing the supply of goods and services in the economy while domestic demand is overheating which contributes to keep inflation entrenched in double digits," he added.

GOVERNMENT'S 'UNORTHODOX' POLICIES

The government, which has imposed strict currency and price controls, has issued billions of dollars in debt this year to try to soak up excess money supply, known as liquidity, seen as stoking inflation.

But after some respite the bolivar currency has been under pressure again on the parallel exchange market and is trading at almost half its official value against the dollar.

The government's price controls on goods such as food have caused inflation despite the intent to use them to curb inflation, economists say.

The controls are in part the reason for shortages because producers sometimes refuse to sell goods to retailers, saying they cannot make a profit.

With supermarket shelves periodically empty of milk or meat, consumers are willing to pay much higher prices for the food when they do find what they are looking for.

Chavez denounces the shortages as the evils of capitalism.