Inflation is a variable offering an overview of the general stability of an economy. It was for that reason that the Advisory Council of Ministers of Treasury or Finance, Central Banks, and Planning Officers of the Andean Community in May 1999 approved the Community target of reducing inflation to a single-digit figure.

Positive trend

The trend toward reduction of inflation in the subregion has been positive, except in the case of Ecuador, which recorded an annualized inflation of 91% for 2000. This result can be attributed to the adjustment of relative economic prices due to the rapid devaluation of the sucre between August 1998 and January 2000, the augmentation of the value added tax (from 10% to 12%), and the successive increases in charges for utilities, fuel, and domestic gas, combined in the latter case with adjustments in pay rates. There was been a noticeable slowdown in inflation in the second half of 2000, however, and its rapid decline is foreseen for 2001 (30%) stemming from the dollarization plan put into effect last year.

Chart Nº 1. Andean Community: Consumer Price Index (CPI)* (%)

* Change over the past twelve months
** Official estimates for Ecuador, Peru, and Venezuela
Source: IMACRO

Venezuela’s inflation in 2000 (13.4%) was at its lowest level since 1986 and occurred within an external context that was made positive by the increase in the price of oil. This allowed local currency to remain below the central parity of the exchange rate band, thereby releasing the pressure on domestic prices.

For Colombia, the annual percentage of change in the CPI in 2000 (8.7%) was second only to the lowest figure for the last thirty years, 9.2%, attained in 1999. This result can be attributed largely to the increase in oil revenues, the slight effect of the depreciation in the exchange rate on price variation (the nominal devaluation amounted to 16%) and the modest recovery of the domestic demand starting in the second half of 1999 and continuing into 2000.

In Peru, there was a 3.73% change in the CPI from December 1999 to December 2000, slightly less than the figure recorded for the previous year (4.03%). Exchange rate stability and a slowing of internal demand that offset the effect of rising fuel prices were responsible for the most part for the attainment of the inflation target.

Bolivia showed an inflation of 3.41% in 2000, 0.28 percentage points higher than in 1999. The country continued its tight money policy, which was associated with a weak demand for money and farmer protests in the final quarter of the year. Inflation jumped slightly in September and October (1.8% and 1.3%, respectively) in response to rising international oil prices and, at the beginning of the year, the increase in the specific excise tax.

Stability in the long term

Simple average inflation in the Andean Community over the five-year period of 1996-2000 was 24.36%, down 22.6 percentage points from that of the previous five-year period. All of the Andean countries except Ecuador are experiencing declining inflation, with little change in the average for each individual country. The resulting improvement in price stability over the medium and long terms will allow economic agents to place more trust in their investment and consumption decisions.

Table No. 1
 

*Non-weighted comparative country averages
Source: IMACRO

Comparison with Latin America

The Andean countries have shown a considerable slowdown in inflation over the past three years, but still far above the average for Latin America. December-to-December inflation in the CAN (24.1%) (simple average) in 2000 was above that for 1999 (19.4%), mainly because Ecuador had the highest rate of inflation in all of Latin America. In sharp contrast to this, Bolivia, at 3.4%, and Peru, at 3.7%, had the lowest rates in South America, with the exception of Argentina, where deflation amounted to 0.7%.

Inflation within the MERCOSUR, for its part, has run overall since 1991 at far below the average for Latin America and the CAN. In 2000, the member countries of this trade bloc (with the exception of Brazil) had a 1.18 percentage point increase in inflation from the figure for 1999 (3.60%).

Chart Nº 2 Latin America: Consumer Price Index (CPI) (%)*

* Past twelve months
** The figure for 2000 corresponds to the change from November 1999 to November 2000.
Source: ECLAC