Is Peru’s Growth Getting Through to the Peruvians?

Inflation is suddenly a hot topic in Peru. In the red corner, we have headlines about chicken and tomatoes up 25% in a week, a CPI number up 1% in February and national inflation spiralling to an official 5.98% YoY with most of the population laughing tragic laughs because if you look closer inflation is higher for two thirds of the country.

In the blue corner we have the finance minister telling us inflation is under control, the stats office telling us that January growth came in at over 10%, the gov’t saying it is all the retailers’ fault and the cabinet chief telling us that Peru’s inflation is 4%.

Far too many hyperlinks there, but it does give an idea of the amount of debate going on right now. It is difficult to see the forest for the trees through so much rhetoric, but looking at a few basic points from as neutral a standpoint as possible would be useful.

1) CPI climbed 1% in February. The gov’t claims it was due to the landslides and the protests that cut supply lines to Lima. It may be worth believing the party line this time, but any more 0.5%+ monthly inflation numbers and Finance Minister Carranza’s inflation targeting will belong in Franz Kafka’s world, not ours. On the downside, this gov’t is showing signs of paranoia about the inflation issue and unions are currently calling for national strikes to protest the price rises.

2) PPI is running at 7.59% per annum, and that’s a sharp increase. Food&bev inflation is at 7.8% per annum, which beats the overall number easily. There is some evidence of retailers hiking prices on a few food products (the gov’t highlighted garlic, of all things). For many, this blame game is getting rather boring and all that’s left is for Alan and co. to blame Hugo Chávez for the price of Broccoli. If construction materials go up 9.46% the person contracting a builder has to pay extra. Period. The government should get on the honest side of the fence and admit things are more expensive.

3) Growth looks solid and strong. The motor is construction, with many an anecdotal tale going around about how land prices are shooting up, labour shortages in the building world etc. The 10.06% January growth figure looks impressive but also sounds reasonable, as it ties in with other numbers coming out right now such as non-skilled and black market labour wage increases, cement dispatches etc.

All well and good, but how does it all add up? Here we go with le chart du jour, which compares Peru’s GDP growth, its salary growth and its official inflation rate. Now this chart does need a little explaining to get it into context so bear with us a moment.


Firstly, all the stats used are official gov’t numbers from either the INEI or the economy ministry (scout’s honour). So to explain, we’ve taken 2003 as the base point for the three sets of numbers, and indexed the year at 1000. Then in the four years that follow the percentage differences are compounded to the starting point. For 2007, we’ve used the very latest figures that drag into 2008 a bit, with February being the cut off for all three numbers. Unfortunately, the national salary figures are way out of date so we’ve used the Lima+metro number.

The standout is clearly a GDP growth of 25% in four years, and that’s a sparkling statistic. However there’s little doubt metals prices have been leading the charge and a lot of the money made isn’t seen by José Publico. That is clear in very rough terms just by looking at the gap between GDP and salary growth. But the latest set of numbers look encouraging for a gov’t pinning all hopes on its trickledown model; for the first time in all this time salaries are outstripping inflation even though it’s inflation rates catching the headlines. That’s good, as long as the stats are reliable. We do have our doubts on this, and the methodology used to take the salaries survey is rather shaky, but there’s no way to dismiss the numbers as false. “Benefit of the doubt” is the phrase that comes to mind.

The bottom line here is that things may finally….finallyFINALLY be getting better for the average Peruvian (at least in Lima), even with inflation numbers that grab headlines and are manipulated by pro and anti gov’t factions. But if things are getting better, why is Alan García’s approval rating running at 28% and his admin at 25%? Could it be something to do with Jorge del Castillo (Garcia’s cabinet chief and front line attack weapon) believing social programs should only go to those parts of the country that voted for García in the last elections? Nah, surely not…….