VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0333/01 0411323
ZNR UUUUU ZZH
R 101323Z FEB 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3439
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2071
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5328
RUEHMN/AMEMBASSY MONTEVIDEO 5306
RUEHSG/AMEMBASSY SANTIAGO 4923
RUEHBR/AMEMBASSY BRASILIA 5107
RUEHSO/AMCONSUL SAO PAULO 2753
RUEHRI/AMCONSUL RIO DE JANEIRO 1859

UNCLAS BUENOS AIRES 000333 
 
SIPDIS 
 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
PASS USTR FOR LESLIE YANG 
TREASURY FOR RAMIN TOLOUI AND CHRIS KUSHLIS AND OCC 
FOR CARLOS HERNANDEZ 
USDOC FOR ALEXANDER PREACHER 
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY 
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ETRD ALOWAR
SUBJECT: JANUARY 2006 INFLATION UPDATE AND PREDICTIONS 
 
REF:  BUENOS AIRES 3020 
 
------- 
SUMMARY 
------- 
 
¶1.  The Consumer Price Index (CPI) rose 1.3 percent in 
January.  This brings the 12-month inflation rate to 
12.1 percent.  Average nominal salaries increased 1.2 
percent in December and the purchasing power of 
salaried workers in December 2005 was 7.1 percent 
higher than in December 2004.  Official surveys put 
the percentage of people living below the poverty line 
at 38.5 percent in the first half of 2005, down from 
40.2 percent in the previous semester.  The percentage 
of people living below the destitution level dropped 
to 13.6 percent during the first half of 2005, down 
from 15.0 percent in the previous semester.  However, 
the peso value of the poverty line and the destitution 
line grew 1.4 percent and 1.0 respectively, in 
January.  According to the Central Bank's survey of 
market expectations, whose methodology changed 
recently, CPI inflation is expected to be 1.0 percent 
in February, and 12.8 percent in 2006.  End Summary. 
 
------------------------ 
THE CONSUMER PRICE INDEX 
------------------------ 
 
¶2.  The official Consumer Price Index (CPI) was 1.3 
percent higher in January 2006 than in December 2005, 
slightly above the Central Bank's (BCRA) consensus 
forecast of 1.2 percent.  January inflation brought 12- 
month inflation to 12.1 percent.  Prices of Goods 
increased 0.3 percent and Prices of Services increased 
2.8 percent in January.  Prices of goods that change 
depending on the season increased a monthly 6.3 
percent, regulated prices increased 0.6 percent and 
the rest, which constitutes "core inflation," 
increased 0.7 percent in January.  Core inflation was 
13.8 percent between January 2005 and January 2006. 
The official CPI measures inflation only in the 
Greater Buenos Aires urban area. 
 
¶3.  Entertainment was the CPI component with the 
highest monthly price rise in January, 7.2 percent, 
followed by Medical and Health Care Services that 
increased 1.8 percent.  The rise of Entertainment 
prices is explained by the beginning of the holiday 
season.  Food and Beverages, and Education were the 
two CPI components that increased the most between 
January 2005 and January 2006, both posting a 15.9 
percent increase.  They were followed by Housing and 
Basic Services, which rose 13.3 percent. 
 
TABLE I 
CONSUMER PRICE INDEX (1999=100) 
 
          CPI PCT CHG       CORE INFLATION 
YEAR         PREV YR             PCT CH PREV YR 
 
2001          -1.5                n.a. 
2002          41.0                n.a. 
2003           3.7                n.a. 
2004           6.1                 6.4 
2005          12.3                14.2 
 
           CPI PCT CHG      CORE INFLATION 
             PREV MO             PCT CH PREV MO 
 
2005 
JAN            1.5                 1.1 
FEB            1.0                 1.3 
MAR            1.5                 2.2 
APR            0.5                 0.8 
MAY            0.6                 0.6 
JUN            0.9                 1.1 
JUL            1.0                 1.0 
AUG            0.4                 0.9 
SEP            1.2                 0.9 
OCT            0.8                 0.7 
NOV            1.2                 1.4 
DEC            1.1                 1.4 
 
2006 
JAN            1.3                 0.7 
 
Source: National Bureau of Statistics and Census 
(INDEC). 
 
------------------------------ 
POVERTY AND DESTITUTION LEVELS 
------------------------------ 
 
¶4.  INDEC publishes a monthly estimate of the value of 
a "total consumption basket" and a "food consumption 
basket."  These baskets are based on estimates of the 
minimum nutritional requirements and other consumption 
habits of people of different ages.  These estimates 
determine the official poverty line and the official 
destitution line, respectively.  For a family of four 
in January, the poverty line was ARP 843.60 (USD 277) 
and the destitution line was 
ARP 388.75 (USD 128).  A family of four is defined as 
a man and a woman in their thirties, an eight-year-old 
girl and a five-year-old boy. 
 
¶5.  The peso value of the poverty line grew 1.4 
percent in January, and rose 13.2 percent in the 
January 2005 - January 2006 period.  The peso value of 
the destitution line increased 1.0 percent in January, 
and rose 15.8 percent in the January 2005-January 2006 
period. 
 
¶6.  The percentage of people living below the poverty 
line was 38.5 percent in the 28 most important urban 
areas of Argentina in the first half of 2005.  The 
percentage of the poor was 40.2 in the second half of 
2004, and 44.3 percent in the first half of 2004.  The 
percentage of people living below the destitution line 
was 13.6 percent in the 28 most important urban areas 
in the first half of 2005.  The percentage of the 
destitute was 15.0 in the second half of 2004, and 
17.0 percent in the first half of 2004.  Some analysts 
believe that the percentage of people living below the 
poverty and destitution lines increased during the 
second half of 2005 because the peso value of the 
poverty and destitution lines rose faster than the 
growth of informal private sector salaries, where most 
of the poor and destitute are employed, if they are 
employed.  The peso value of the poverty and 
destitution lines grew 6.8 and 8.8 percent, 
respectively, in the June-December 2005 period, while 
informal private sector salaries grew 5.8 percent. 
 
------------------------ 
AVERAGE NOMINAL SALARIES 
------------------------ 
 
¶7.  INDEC estimated that average nominal salaries 
increased 1.2 percent in December 2005 over November 
¶2005.  Inflation was 1.1 percent during that period. 
The average nominal salary increase in December was 
due to increases of 1.6 and 1.5 percent in formal and 
informal private sector salaries, respectively, while 
public sector salaries did not change.  Public sector 
salaries mentioned here include salaries of federal 
and provincial employees. 
 
¶8.  Average nominal salaries grew by 20.3 percent 
during 2005.  This growth was due to increases of 
26.0, 12.6 and 12.9 percent in formal private sector, 
informal private sector and public sector salaries, 
respectively.  Inflation in the same period was 12.3 
percent.  Therefore, the purchasing power of the 
average salaried worker in December 2005 was on 
average 7.1 percent higher than it was in December 
¶2004.  However, it was only formal private sector 
workers who posted a significant gain in real 
salaries. 
 
----------------------- 
WHOLESALE PRICE INDEXES 
----------------------- 
 
¶9.  The Wholesale Price Index (IPIM) increased 1.3 
percent during January 2006, bringing the total IPIM 
increase since January 2005 to 13.1 percent.  This 
index measures the price changes of national products 
(including Primary Products and Manufactured Goods and 
Electric Power) and imports sold in the domestic 
market.  The IPIM also includes taxes.  The 1.3 
percent increase in January was due to a 4.4 percent 
increase in Primary Product prices and a 0.2 percent 
increase in Manufactured Goods.  The increase in 
Primary Products is chiefly explained by a 7.0 percent 
increase in Oil and Gas prices.  Electric Power prices 
decreased 0.7 percent.  Import prices increased 0.7 
percent. 
 
¶10.  The Wholesale Basic Prices Index (IPIB) has the 
same coverage as the IPIM, except that it excludes 
taxes.  The IPIB increased 1.3 percent in January, 
bringing the total IPIB increase since January 2005 to 
13.7 percent.  The 1.3 percent increase in January was 
due to a 4.4 percent increase in Primary Product 
prices and a 0.2 percent increase in Manufactured 
Goods.  Electric Power prices decreased 0.7 percent. 
Import prices increased 0.7 percent. 
 
¶11.  The prices for the sectors measured in the IPIM 
and IPIB are weighted using the corresponding value of 
product net of exports.  INDEC has devised another 
index, the Basic Prices to Producers Index (IPP), 
whose weights are calculated considering sales in the 
internal market as much as sales to the external 
market and excluding imports and taxes.  The IPP 
increased 1.1 percent in January 2006, bringing the 
total IPP increase since January 2005 to 14.3 percent. 
Primary Products increased 4.7 percent and 
Manufactured Goods decreased 0.2 percent.  Electric 
Power prices decreased 0.7 percent. 
 
------------------ 
CONSTRUCTION COSTS 
------------------ 
 
¶12.  The INDEC index measuring private housing 
construction costs in Greater Buenos Aires increased 
0.8 percent in January 2006.  These costs were 17.0 
percent higher than in January 2005.  The January 
increase is the result of a 1.1 percent increase in 
materials, 0.6 percent rise in labor costs, and a 0.1 
percent decrease in other construction costs.  Wages 
of salaried employees working for the sector increased 
0.4 percent and payments to the self-employed grew 1.1 
percent.  Professional fees are not included among the 
labor costs considered by INDEC in the construction 
sector. 
 
------------------------------------ 
BCRA'S SURVEY OF MARKET EXPECTATIONS 
------------------------------------ 
 
¶13.  The BCRA discontinued its bi-weekly survey of 
market expectations in December 2005 and announced a 
change in methodology to make the survey also include 
forecasts from "large firms with economic analysis 
units".  The new survey will be published monthly. 
Before the methodology change, the BCRA survey 
averaged the forecasts from approximately 54 local and 
international analysts, mainly banks, university 
economic departments and think-tanks.  Upon 
continuation of the survey in February, the BCRA has 
not made public the large firms that are now 
contributing to the survey. 
 
¶14.  The general view, is that the BCRA survey has 
lost reliability after the change in methodology. 
Most large firms in Argentina are negotiating with the 
GOA in different fields:  large utilities are 
renegotiating tariffs and concession contracts, and 
most of the remaining large firms are negotiating 
price-fixing agreements as a way to control inflation. 
President Kirchner showed dissatisfaction with those 
whose economic predictions differed from the GOA's in 
the recent past.  He also suggested that those 
predicting high inflation rates are in fact creating 
inflation (see reftel).  This attitude toward those 
who make negative predictions has influenced some 
local analysts, and could encourage some large firms 
to withhold their true forecasts, to avoid having a 
negative impact on their relationship with the GOA. 
 
------------------------------ 
INFLATION PREDICTIONS FOR 2006 
------------------------------ 
 
¶15.  The GOA's national budget includes a 9.1 percent 
forecast for 2006.  The BCRA monetary program for 2006 
announced on December 29, 2005, established an 
inflation target of between 8-11 percent for 2006. 
According to the BCRA's last survey of market 
expectations published on February 8, 2006, CPI 
inflation is expected to be 1.0 percent in February, 
and 12.8 percent in 2006. 
 
¶16.  To see more Buenos Aires reporting, visit our 
classified website at: 
http://www.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ