Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 13 Oct 2014

Inflation falls slightly in September

Event

Annual inflation stood at 1.7% in September 2014, down from a high of 2% in August 2014, but almost double the annual rate of inflation registered in September 2013. In month-on-month terms, however, it fell slightly.

Analysis

Because of the combination of stronger growth coupled with higher prices for foods and imported oil, inflation has been creeping up this year after ending 2013 at just 0.8%. However, the 0.1% deflation in September is only the second time this year that prices have fallen in month-on-month terms (the other was back in April, with a decline of 0.5%).

Looking at the detailed data for the year to September, inflation is still being mainly driven by rising prices for food and non-alcoholic beverages (up by 5.5% year on year). Although the monthly prices in this sub-sector actually dropped by a slim 0.5%, the annual rate is still more than double that of last year, largely because of the difficult weather conditions that have interrupted the normal harvest periods. The regional shortage of red beans-part of the staple diet in Central America-has had a clear negative impact on supply and prices at a local level.

Meanwhile, the year-on-year prices of alcoholic beverages rose by 4.4%, hotels, cafes and restaurants by 2.3% and education by 1.8%. Transport costs increased by just 0.6% in September, compared with a yearly high of 2.9% in May, largely because of the decline in world oil prices; a slowdown in the rise in transport costs often helps to keep prices down elsewhere in the small economy, especially the price of basic foodstuffs. Elsewhere, there was a 0.7% year-on-year fall in prices for footwear and clothing, a 0.3% decline in housing costs, a 1.1% fall in communications prices and a 0.2% slip in the cost of medicines. The largest monthly fall in prices was in communications (0.7%) and the largest rise was for alcoholic beverages (0.5%).

Compared with its neighbours, El Salvador still has the lowest rate of inflation in the region, in part thanks to its dollarised economy. By way of comparison, annual inflation in September was 6.1% in Honduras, 3.5% in Guatemala and 6.5% in Nicaragua.

Impact on the forecast

Our forecast for annual inflation of 1.5% in 2014 remains unchanged.

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