VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1573/01 1981243
ZNR UUUUU ZZH
R 171243Z JUL 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5230
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2239
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5613
RUEHMN/AMEMBASSY MONTEVIDEO 5685
RUEHSG/AMEMBASSY SANTIAGO 5219
RUEHBR/AMEMBASSY BRASILIA 5410
RUEHSO/AMCONSUL SAO PAULO 2941
RUEHRI/AMCONSUL RIO DE JANEIRO 2022

UNCLAS BUENOS AIRES 001573 
 
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 ALOW AR
SUBJECT: JUNE 2006 INFLATION UPDATE AND PREDICTIONS 
 
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SUMMARY 
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¶1.  The Consumer Price Index (CPI) rose 0.5 percent in June, 
bringing the 12-month inflation rate to 11 percent.  Average nominal 
salaries increased 1.5 percent in May and the purchasing power of 
salaried workers in May 2006 was 5.2 percent higher than in May 
¶2005.  According to the BCRA's last survey of market expectations 
published on June, INDEC's CPI inflation is expected to be 0.9 
percent in July, and 11.5 percent in 2006.  The large amount of 
goods and services that are subject to GOA controls or "voluntary" 
price agreements makes it very likely that observed inflation as 
measured by the INDEC, the official bureau of statistics, diverges 
from actual inflation.  This could result in lower inflation 
expectations in the short run.  However, it will not be sufficient 
to counteract economic policies that fuel aggregate demand in order 
to achieve high GDP growth rates. 
 
------------------------ 
THE CONSUMER PRICE INDEX 
------------------------ 
 
¶2.  The official Consumer Price Index (CPI) was 0.5 percent higher 
in June 2006 than in May 2006, below the 0.7 percent predicted by 
the Central Bank's (BCRA) consensus forecast.  June inflation 
brought 12-month inflation to 11 percent.  Prices of Goods increased 
0.4 percent and Prices of Services increased 0.6 percent in June. 
Prices of seasonal goods increased by 0.4 percent, regulated prices 
increased 0.2 percent, and the rest, which constitutes INDEC's "core 
inflation" but also includes prices that are controlled or 
agreed-upon with the GOA, increased 0.6 percent in June.  Core 
inflation was 12.2 percent between June 2005 and June 2006.  The 
official CPI measures inflation only in the Greater Buenos Aires 
urban area. 
 
¶3.  Housing and Basic Housing Services, Home Maintenance and 
Equipment, and Food and Beverages were the three CPI components with 
the highest monthly price rises in June, increasing 0.8 percent, 0.7 
percent and 0.5 percent, respectively.  Education was the CPI 
component that increased the most between June 2005 and June 2006, 
posting a 16.9 percent increase.  Education was followed by 
Clothing, which rose 16.2 percent, and Food and Beverages, which 
increased 13 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 
FEB   0.4    0.7 
MAR   1.2    1.7 
APR   1.0    0.9 
MAY   0.5    0.7 
JUN   0.5    0.6 
 
Source: National Bureau of Statistics and Census (INDEC). 
 
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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 June, the 
poverty line was ARP 856.86 (USD 278) and the destitution line was 
ARP 391.26 (USD 127).  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 increased 0.5 percent in 
June, and rose 10.1 percent in the June 2005 - June 2006 period. 
The peso value of the destitution line did not change in June, and 
rose 10.6 percent in the June 2005-June 2006 period. 
 
¶6.  The percentage of people living below the poverty line was 33.8 
percent in the 28 most important urban areas of Argentina in the 
second half of 2005.  The percentage of the poor was 38.5 in the 
first half of 2005, and 40.2 percent in the second half of 2004. 
The percentage of people living below the destitution line was 12.2 
percent in the 28 most important urban areas in the second half of 
¶2005.  The percentage of the destitute was 13.8 percent in the first 
half of 2005, and 15.0 percent in the second half of 2004. 
 
------------------------ 
AVERAGE NOMINAL SALARIES 
------------------------ 
 
¶7.  INDEC estimated that average nominal salaries increased 1.53 
percent in May 2006 over April 2006.  Inflation was 0.5 percent 
during that period.  The average nominal salary increase in May was 
due to increases of 1.6, 1.8 and 1.1 percent in formal private 
sector, informal private sector, and public sector salaries, 
respectively.  Public sector salaries include salaries of both 
federal and provincial employees. 
 
¶8.  Average nominal salaries grew by 17.3 percent between May 2005 
and May 2006.  This growth was due to increases of 21.2, 16.8 and 
8.4 percent in formal private sector, informal private sector and 
public sector salaries, respectively.  Inflation in the same period 
was 11.5 percent.  Therefore, on average, the purchasing power of 
the average salaried worker in May 2006 was 5.2 percent higher than 
it was in May 2005.  Both formal and informal private sector 
salaries had significant gains in purchasing power of 8.6 and 4.8 
percent, respectively.  However, public sector salaries experienced 
a 2.7 percent decline. 
 
----------------------- 
WHOLESALE PRICE INDEXES 
----------------------- 
 
¶9.  The Wholesale Price Index (IPIM) increased 0.8 percent during 
June 2006, bringing the total IPIM increase since June 2005 to 12 
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 0.8 percent increase in June was due to a 0.3 
percent decline in Primary Product prices and a 1.0 percent increase 
in Manufactured Goods.  The decline in Primary Products was largely 
the result of a 7.6 percent decline in Fish Products prices, and a 
2.2 percent decline in Agricultural prices.  Electric Power and 
Import prices increased 2.5 and 2.4 percent, respectively. 
 
¶10.  The Wholesale Basic Prices Index (IPIB) has the same coverage 
as the IPIM, except that it excludes taxes.  The IPIB increased 0.8 
percent in June, bringing the total IPIB increase since June 2005 to 
12.4 percent.  The 0.8 percent increase in June was due to a 0.4 
percent decline in Primary Product prices and a 1.1 percent increase 
in Manufactured Goods.  Electric Power prices increased 2.5 percent. 
 Import prices increased 2.4 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 0.6 percent in June 
2006, bringing the total IPP increase since June 2005 to 12.4 
percent.  Primary Products decreased 0.4 percent and Manufactured 
Goods increased 1 percent.  Electric Power prices increased 2.5 
percent. 
 
------------------ 
CONSTRUCTION COSTS 
------------------ 
 
¶12.  The INDEC index measuring private housing construction costs in 
Greater Buenos Aires increased 1.6 percent in June.  These costs 
were 21.2 percent higher than in June 2005.  The June increase is 
the result of a 1.0 percent increase in materials, a 2.3 percent 
rise in labor costs, and a 1.7 percent increase in other 
construction costs.  Wages of salaried employees working for the 
sector increased 2.6 percent and payments to the self-employed grew 
1.6 percent.  Professional fees are not included among the labor 
costs considered by INDEC in the construction sector. 
 
------------------------------ 
INFLATION PREDICTIONS FOR 2006 
------------------------------ 
 
¶13.  The GOA's national budget includes a 9.1 percent inflation 
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 June, INDEC's CPI inflation is expected to 
be 0.9 percent in July, and 11.5 percent in 2006. 
 
¶14.  The Hugo Haime survey of inflation expectations of people older 
than 18 years old, concluded that there was a deceleration in 
inflation expectations in June 2006 over the previous month.  Only 
11 percent of the sample anticipates further price increases for 
June.  This survey also shows that Food and Beverages, and Clothing 
are the two CPI components whose prices are expected to grow most. 
 
¶15.  Macrovision Consulting showed that some 58 percent of the goods 
and services included in the INDEC's CPI were somehow controlled, 
agreed-upon or regulated by the GOA.  This firm forecasts a 16.2 
percent inflation in 2006 for the group of prices that are not 
affected by GOA actions or agreements. 
 
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COMMENT 
------- 
 
¶16.  The large and growing number of goods and services that are 
subject to GOA controls or "voluntary" price agreements makes it 
likely that observed inflation as measured by INDEC's CPI diverges 
from real inflation.  A lower-than-real observed inflation could 
explain lower inflation expectations in the short run.  However, 
lower expectations will not be sufficient to counteract economic 
policies that stimulate aggregate demand through fiscal, monetary 
and income measures in order to obtain high GDP growth rates. 
 
¶17.  To see more Buenos Aires reporting, visit our classified 
website at: http://www.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ