Chileans tighten belts in face of inflation

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By Rodrigo Martinez

SANTIAGO (Reuters) - Flanked by lettuces at his stand atthe Chilean capital's largest open air market, Pedro Munoz saysinflation at 14-year highs means new clients for him as theyturn their backs on costlier supermarkets.

"Things aren't going too badly for me, but the economy isin bad shape. Just watch the news, it's catastrophic," the65-year-old said, bemoaning sharp rises in fuel and food pricesstemming from abroad.

Used to annual inflation of around 2.0 percent in recentyears, June's 12-month figure of 9.5 percent has prompted manyChileans to talk of economic crisis, prompting PresidentMichelle Bachelet to try and convince people there isn't one.

The central bank has raised its benchmark interest rate to7.25 percent, the highest level in nearly a decade, in a bid tocurb inflation running at three times the bank's target of 3.0percent over a 24-month horizon.

Inflation is one reason Bachelet's approval rating isdepressed, and if it worsens may help displace the centre-leftcoalition that has governed Chile since Augusto Pinochet'sdictatorship ended in 1990 at elections next year.

"(Public) perception of the economy has grown increasinglypessimistic," said Carolina Segovia, a researcher at pollsterthe centre for Public Studies (CEP).

"A few years ago, inflation had practically disappeared asa leading problem and is resurgent now," she added, sayingissues like crime however continued to be bigger worries.

The pessimism is a stark contrast to windfall profitsthanks to high copper prices, which have pushed the fiscalsurplus to record highs. Chile is the world's largest copperproducer.

"I used to go more to the supermarket," said Marisol Diaz,who like other housewives from upmarket neighbourhoods isopting for cheaper open air markets.

Supermarket sales in the Chilean capital fell 6.4 percentin June compared to a year earlier, according to NationalChamber of Commerce data.

Commenting on economic data, Interior Minister EdmundoPerez Yoma this month urged the public to "grit its teeth".

ECONOMY STILL GROWING

Chile's economy is still growing at a decent pace, withboth the government, the central bank, analysts and theInternational Monetary Fund expecting GDP growth of over 4.0percent this year after an expansion of 5.1 percent last year.

The economy has not contracted since 1999, during the Asianeconomic crisis of that year.

Finance Minister Andres Velasco is quick to highlightbuoyant investment and job creation data.

"I fully agree with the diagnosis that there is no crisis,"said Pablo Correa, chief economist at Santander's research arm."There is no contraction in GDP, no massive destruction ofemployment. The headline numbers continue to be good."

"While many salaried jobs are indexed to inflation, asignificant percentage of the population does not have thatsafety net, and does generate a significant fall in disposableincome which we haven't seen for at least 10 years."

Correa does not expect to see inflation converge with thecentral bank's 3.0 percent target until 2011. Santanderforecasts inflation of 7.1 percent for 2008.

According to CEP's most recent poll, 52 percent of Chileansdisapprove of the government's handling of the economy. Thesame poll found that centre-right opposition leader andinvestor Sebastian Pinera would win next year's presidentialelection if it were held now. Bachelet cannot run for aconsecutive term.

Segovia believes inflation could have an impact on theelection if it continues to quicken, but believes it could loserelevance if it eases.

The government has injected $1 billion (500 million pounds)into a fund to help cushion fuel price increases, given Chilemust import nearly all of its fuel needs and is suffering anenergy squeeze.

Gasoline costs around $1.30 a litre.

"It's like sewing a patch on a pair of favourite jeans,"said teacher Raymundo Silva, referring to the fund as he waitedto fill his pick-up truck. "You keep adding the patches, butyou know they will eventually fall down."

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