Inflation threatens Salvadoran families

In a recent public opinion poll, 83% of Salvadorans reported that the cost of living was going up, and a significant percentage believed not controlling inflation was one of the primary failures of president Funes' government. A new report at 7marketSpot.com puts some numbers on inflation in El Salvador:

The continuing impact of higher international commodity prices has put the Funes administration under pressure to curb rising inflation, even as domestic demand remains weak. According to data from the Banco Central de Reserva de El Salvador (BCR, the Central Bank), annual inflation jumped to 6% in April, from 2.1% in late 2010, and -0.2% a year earlier, reflecting in part much higher petrol prices this year—in January-March oil imports increased by a sharp 40% year on year. Moreover, owing to a high dependence on imported grains and wheat, consumers have been badly affected by rising costs of imported food items.

According to a recent study by the Inter-American Development Bank (IDB), El Salvador is only one of four Latin American countries (alongside Bolivia, Guatemala and the Dominican Republic) where the knock-on effect of a rise in international food prices can lead to a 10% or more increase in the domestic consumer price index. Although external pressures are expected to subside somewhat in the second half of 2011, the BCR now estimates that inflation will reach 4.8% in December 2011, compared with its original estimate of 2.8%. In addition to fuelling public discontent, higher inflation risks setting back the country’s modest recovery, with lower consumer purchasing power and falling deposits (reflecting negative real savings rates) resulting in lower credit growth.

Given the limited scope for monetary policy action in the dollarised economy, the Funes administration has chosen a sector-by-sector approach to deal with rising inflation. In May the Legislative Assembly voted to eliminate a US$0.16/gallon tax applicable to petrol and diesel sales until the end of the year, to soften the impact on consumers. At the same time, the government has been subsidising the cost of imported beans, a staple crop consumed by almost all Salvadoran households.

Inflation is one symptom of the vulnerability of the Salvadoran economy to forces outside of its control.   Dependent on imported foodstuffs, without domestic gasoline production, and exposed to natural disasters which can wipe out a year's harvest of corn, rice or beans, El Salvador is always one step away from greater economic hardship.   The country needs policies which will increase food self-sufficiency and other sustainable practices in energy and other markets.