This page has been validated.
Approved For Release 2006/04/19 ; CIA-RDP85T00875RO01700040058-3
SECRET
- Although the Allende administration has kept the private sector on a relatively tight financial rein, the wage-price spiral and the public sector's deficits have inflated the money supply remarkably. During 1971, total money supply increased by 114%. compared with an average increase of 42% annually during 1965-70. A similar expansion rate was evident during the first six months of 1972. and money supply growth has accelerated in more recent months owing to massive deficit financing.
- Only in recent months have Chile's financial gyrations apparently provoked a rising velocity of money circulation, which — if it persists, and especially if it accelerates — raises the specter of runaway inflation and market breakdown. Because output growth and official price rises lagged far behind monetary expansion in l971, money supply jumped to 20% of the officially calculated GDP, compared with about l2% in the late l960s (see Figure 6). Even with a GDP value reflecting increased recourse to the black market and other sales at uncontrolled prices, a rising percentage would be obtained — indicating that money velocity slowed considerably. The situation changed markedly in 1972, however, because fewer people were willing to hold cash balances, official price rises accelerated, and more and more goods were being sold through the black market. We estimate that money velocity changed little during the first six months and then speeded up substantially in the latter half of the year. Price Controls — An Increasingly Leaky Sieve
- Despite highly expansionary budget and wage policies, Allende's attempt to hold down inflation through strict price controls initially was fairly successful. During 1971 the official cost-of-living index rose by only 22%, compared with 35% in 1970. Shortages became common, however, and waiting lists for consumer durables and other goods lengthened. Chile's black market, long a factor whenever imports and other scarce goods are concerned, was increasingly resorted to for essential items such as food and clothing. By mid-1972, Allende apparently decided that price increases were preferable to growing shortages, and official prices were boosted substantially. After rising by an average of 4% monthly through July, these prices jumped 73% in the next three months (see Figure 7). By the beginning of November the official consumer price index had risen 130% since the first of the year.
- Accustomed to high inflation rates, the populace nevertheless has been disturbed by the recent huge price jumps. Especially shocking were the changes in August and September, when the price of one staple foodstuff after another — including bread, rice, meat, and fish — virtually doubled overnight. These increases accelerated the flight from money into goods, despite Allende's promise to shortly clamp the lid on prices. Large wage
16
Approved For Release 2006/04/19 ; CIA-RDP85T00875RO01700040058-3
SECRET
