The fall in consumer inflation in March broke a run of rising inflation and brought the 12 month rate down from 20.4%. The central bank said that the fall in prices was due to the [three percentage point] reduction in Vat; a fall in controlled prices and an major improvement in food supplies. The government controls the prices of 120 staple foods. The government will cut Vat rates again by a further two percentage points in July, bringing the total cut to five percentage points.
After the first phase of the cut, Vat rates are 11%. The next phase will bring them down to 9%. The government wants to bring inflation down from the 17% rate it hit in 2006. This was two percentage points above the target.
The central bank noted that the turnaround in March was substantial: in February prices had risen by 1.4%. It said that the change, both on February's rate and March 2006 9when inflation was 0.9%) was the biggest for 19 years. The March figure brings the rate for the first three months down to 2.6%.
Food prices fell furthest in March, by 4.7%. There were also substantial falls in communications prices (minus 2.6%) and transport prices (minus 0.3%). Even service sectors saw their inflation rates ease: the health subindex fell back from a month-on-month rise of 4.5% in February to 3.8% in March; restaurant and hotel inflation was down from 5.2% to 2.9%while household equipment fell from 3.4% to 2.1%.
Overall, goods' price inflation fell from 0.8% in February to minus 2.3% in March and service price inflation fell from 2% to 1%. The government is muddying the statistical waters by insisting that the central bank switch to publishing a new national rate rather than just a rate for Caracas, which has been traditional.
The finance minister, Rodrigo Cabezas, has set an inflation target of 12% for 2007. President Hugo Chávez wants a rate of less than 10% in 2008.
Jorge Giordani, the planning and development minister, said that the public sector would continue to be the economy's main motor this year but that the private sector should start to play a greater role, as it has been doing in infrastructure. Construction grew by 30% in 2006 and has been rising now for three consecutive years.
Vat : The finance minister, Rodrigo Cabezas, announced that the government would eliminate Vat completely in 2009. In 2004, the Chávez government ended the 1% tax on business assets (the Impuesto a los Activos Empresariales or IAE), and then in 2005 it ended the tax on bank balances which held less than US$520 in them.
The government has made up for this lost revenue by increasing taxes on oil and clamping down on income tax evasion. Cabezas argues that Vat is the most regressive tax on the planet since it is flat and not progressive. Moreover, as the poor pay the same rate as the rich, their lower incomes are hit the hardest by Vat.
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