March 6, 2012 / 4:34 PM / 7 years ago

UPDATE 2-Venezuelan inflation rate falls on price controls

* Smallest price rise since January 2008

* Venezuela’s annual inflation still highest in the Americas (Adds economist comment)

By Eyanir Chinea and Marianna Parraga

CARACAS, March 6 (Reuters) - Venezuela’s inflation slowed in February to 1.1 percent, the smallest monthly increase in more than four years, due largely to price controls set by President Hugo Chavez’s government.

The trend, however, is unlikely to last, economists warned, as businesses pass on losses from price controls elsewhere, annual salary rises kick in, and public spending rises ahead of the Oct. 7 presidential vote.

Venezuela had the highest annual inflation in the Americas last year, at 27.6 percent, and analysts have predicted an even higher figure for 2012 because of a pre-election spending bonanza by Chavez’s government.

Officials have sought to combat inflation with new price controls on some basic goods in food, health and other sectors from the end of last year.

“Obviously, the February figure is linked to the price to controls, but there is also a fall in consumption ... due the falling purchasing power of salaries,” said economist Angel Garcia Banch, of Econometrica, a local think-tank.

Annual inflation in the 12 months to February was still a whopping 25.6 percent, the central bank said. Yet the monthly increase for February held below a 1.5 percent rise in January and was the smallest rise since January 2008.

“This is the result of a rigid structure of controls. They are reaping the fruits of that,” said Asdrubal Oliveros, an economist with Caracas-based Ecoanalitica. “But long-term, this could have opposite effects like shortages.”

Alcohol and tobacco led the rise in prices at 2.2 percent, followed by health costs at 1.8 percent. Food and beverage costs, which have a high weighting in the overall figure, rose 1.2 percent.

The communications and house rental sectors, both heavily regulated, rose just 0.2 and 0.3 percent, respectively.

“NOT SUSTAINABLE”

In addition to freezing some costs, the government heavily subsidizes many basic products for sale in poor areas to try and counteract the impact of inflation.

Economists predicted inflation would rise later in the year due to expected salary rises in May and higher public spending by the Chavez government in the run-up to the presidential vote.

“The repression of prices is not sustainable,” Banchs said, adding that businesses would seek to compensate a freeze in prices in some controlled sectors with higher rises in others.

The high cost of living is a big factor for voters ahead of the poll in October, when Chavez will seek another six-year term. His challenger is Miranda state Governor Henrique Capriles, a 39-year-old center-left politician who admires Brazil’s “modern left” model.

The official inflation goal for 2012 is 20-22 percent.

“The government is in a conundrum. They either lower inflation and create shortages, which will not help politically, or they let inflation go a bit but control shortages,” Oliveros added.

Chavez, 57, is currently in Cuba recovering from new surgery to remove a cancerous tumor.

News of a recurrence in Chavez’s illness after he had declared himself cancer-free has brought a rally in the country’s widely traded bonds as investors bet a health downturn could bode well for the opposition ahead of the vote.

Any sign the socialist leader could be toppled by a more market-friendly government affects the price of Venezuela’s bonds, which have risen 25 percent since Chavez announced the discovery of a new lesion in his pelvis two weeks ago. (Writing by Andrew Cawthorne and Mica Rosenberg; Editing by Marianna Parraga, Andrea Evans, Leslie Adler)

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