August 31, 2009 / 6:14 PM / 10 years ago

Venezuela's "strong bolivar" swamped by inflation

* Caracas one of world’s most expensive cities

* Shortage of U.S. dollars fuels price increases

* Inflation hits as economic growth stalls

By Robert Campbell

CARACAS, Aug 31 (Reuters) - Coffee and a pastry: $8.14. School supplies: $164. A middle-class weekly family shopping trip: $830. With prices like these it is no surprise Venezuela’s capital, Caracas, was rated in July one of the world’s priciest cities.

Oil-rich Venezuela imports much of its food, clothing and other goods, and while consumers have been long used to double-digit inflation, the recent spurt of price increases is hitting hard after five years of economic growth ended in the second quarter.

While other Latin American countries have seen inflation moderate with the global economic slowdown, the rate of inflation in Venezuela has barely slowed as lower oil revenue forces the government of President Hugo Chavez to restrict foreign currency to the private sector.

The surging cost of living put Caracas as the second most costly city in the Americas behind New York, according to a July study published by human resources consultancy Mercer.

In line with Chavez’s anti-capitalist policies, Venezuela severely restricts currency flows and has a rigid exchange rate, policies many economists say are feeding inflation.

Importers unable to get permits to buy currency at the official exchange rate of 2.15 to the U.S. dollar turn to the tolerated black market, where the greenback recently traded as high as 6.7 bolivars, nearly double the level of a year ago.

The shortage of dollars has undermined the so-called “strong bolivar,” the name given to the currency after the government lopped off three zeros in 2007.

“Everything is so expensive. Money disappears like sugar in water,” said Yulimar Chirinos, shopping for school supplies with her 8-year-old daughter in a working-class district.

The sky-high cost of living in Caracas, where the minimum monthly wage will be $450 from Sept. 1, is partly mitigated by price controls and subsidies on basic foods and home supplies.

However, imported luxuries that wealthier Venezuelans have long been used to, such as salmon flown in from Norway, push the cost of weekly shopping to eye-watering levels. Middle class consumers say they have been able to keep up spending through pay increases and by cutting out other expenses.

In the 12 months to July, inflation reached 23.6 percent, but consumers and economists say the official measure understates price increases for many goods and services.

STIMULUS PLANNED

Opinion polls regularly put inflation as one of the most pressing problems facing the country, but the government has refused to shift its strategy of price controls and a fixed exchange rate in favor of more orthodox monetary policy.

But the policy only functions if enough dollars reach importers.

“The proportion of imports bought at the official rate declined to 49.2 percent in the first quarter relative to 64.9 percent a year earlier,” Credit Suisse economists wrote in a research note last week.

The OPEC nation’s chronic inflation poses a thorny problem for the government as it prepares its second stimulus package of the year to prop up the economy.

Stimulus spending will likely boost inflation unless the distorted foreign exchange system is tackled, economists say.

Chavez said on Sunday he plans to wait until the end of September to introduce new economic policies.

In the past the government has resorted to sales of billions of dollars in debt to mop up liquidity and provide a legal means of acquiring dollars, a plan that has succeeded in temporarily reducing the black market exchange rate.

The recent recovery in oil prices should allow more dollars to flow to importers and reduce pressure on the black market exchange rate, economists said.

Nevertheless, consumers are likely to continue to spend entire paychecks and shun savings in a country where interest rates are kept below inflation to encourage consumption.

“Why save? It will be worthless in a few months. It’s better to just spend the money and enjoy yourself while you can,” said Maria Elena Blanco. (Reporting by Robert Campbell; Editing by Padraic Cassidy)

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