UPDATE 2-Venezuela inflation rate falls, but seen spiking

By Eyanir Chinea CARACAS, Nov 5 (Reuters) - Venezuela's inflation rate fell in October to a four-month low but was expected to spike again toward the end of the year, posing a major problem for President Hugo Chavez, the central bank said on Thursday. Consumer prices in October rose 1.9 percent, down from the year's high of 2.5 percent in September and the lowest since 1.8 percent in June. Inflation has remained high in Venezuela despite a contraction in the economy, fueled by unmet demand for goods and distortions caused by currency exchange controls. The inflation rate, which was 31 percent last year and remains the highest in Latin America, is a threat to President Hugo Chavez's popularity and could be a factor in parliamentary elections next year. Inflation soared 20.7 percent in the first 10 months of this year, and experts say it will likely climb above the government's forecast of 26 percent by the end of the year. "Venezuela continues to demonstrate a high, sustained rate of inflation and it will again end the year with the highest inflation rate in Latin America.

We estimate that inflation will be between 26 and 30 percent by the end of the year," said Jose Manuel Puentes, a Venezuelan economist. Another local economist, Pavel Gomez, said although the October rate may have been the lowest since June, "even so, it is not a low figure." Extra end-year salary payments would exert upward pressure, especially in December which is a "highly inflationary" month, he said. October inflation was led by goods and services at 3.6 percent, education at 2.7 percent, and household appliances at 2.3 percent. Earlier this week, the head of Venezuela's central bank said inflation was his main concern, and he hoped it would be down to single digits in 2012. Experts have taken a dim view of the government's efforts to tame inflation. Alberto Ramos, an economist at Goldman Sachs in New York, said Chavez's government has failed to build a strategy to combat inflation, which has become "deeply entrenched" in the Venezuelan economy. "Over the last 13 months core inflation averaged an unacceptable 2.6 percent per month, ... the authorities are yet to articulate a coherent and credible set of policies to deal with ingrained high inflation," Ramos said Inflation in import-dependent Venezuela has been exacerbated by currency distortions, analysts say. While the official exchange rate is 2.15 bolivars to the dollar, the greenback trades for around 5 bolivars on the parallel market where many importers buy dollars. Some economists say a devaluation of the bolivar is long overdue, but such a move is unlikely with the upcoming elections. "We suspect that the precise timing and magnitude of the peg adjustment will be determined mostly by political considerations," Ramos said. (Writing by Rebekah Kebede; Editing by Leslie Adler) (([e-mail]; Reuters Messaging: [e-mail]; Tel: [phone])) Keywords: VENEZUELA INFLATION (For help: Click "Contact Us" in your desk top, click here or call 1-800-738-8377 for Reuters Products and 1-888-463-3383 for Thomson products; For client training: [e-mail]; [phone]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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