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Chile's strange inflation rate tracker

There is a weird little thing that Chile has the dubious honor of inventing that drives people crazy: the U.F. — Unidad de Fomento, or Development Unit. It’s an adjustable measurement based on the Consumer Price Index. In other words, it keeps track of the inflation rate on a daily basis.

That wouldn’t be so bad if it were only a useful tool for analysts, economists, the finance ministry, the central bank or all those research and planning units, departments and institutions. But that is not the case. We are all governed by the U.F. — enslaved, that is.

The U.F. was created in 1967 as a way to measure inflation every trimester and it was applied to long-term investments. These would be adjusted each trimester according to the U.F. The U.F. began with a value of 100 and it would adjust to the inflation rate of the previous trimester.

But in 1975, the economic mentors of Chile’s military rulers — called the “Chicago boys” because they had all studied at the University of Chicago under Milton Friedman — came up with the brilliant idea of extending the U.F. to the entire economy and adjusting it on a monthly basis. Two years later, when the inflation rate was over 80 percent, these same avant garde free-marketers decided to readjust the U.F. on a daily basis.

This was great for people with savings in the banks. But a slap in the face for the rest of the population. Banks love to offer loans in U.F. Stores sell products in U.F. The rent is in line with the U.F. So, for example, if your rent is in U.F. and the contract requires readjusting the rent amount on a monthly basis, if you were paying $100 in January, and inflation was 10 percent during that month, your landlord could raise your rent to $110 in February, and so on throughout the year.

It is not a currency or anything tangible, except for the headache. Because, naturally, salaries are not readjusted in U.F. on a daily basis, if at all.

So what does all this mean? That Chileans, who tend to buy everything on credit, never know how much they’re going to have to dish out the next day, next week, month or year. It means that if you bought a refrigerator in “comfortable quotas in U.F.,” what you pay for the first month’s quota may be radically different than two, three, four, six quotas later, and you just never really know how much that will be because it depends exclusively on the ability of the current economic mentors to keep inflation down.

There was a quaint populist presidential candidate (and owner of banks and supermarkets) in 1989 who boasted of having amassed his fortune starting out with just four chicks. Those four chicks grew and had other chicks, which in turn had other chicks, and so on, and after a while, he had a whole chicken farm. A tale of effort and perseverance. Of course, very few believed him. But one of his central campaign promises was to eliminate the U.F. in a day. With the snap of his fingers.

 

"Fra-Fra” — as he was popularly called — was never taken too seriously for many other reasons. But people would have given anything to smash the U.F., obliterate it, wipe it off the face of the earth. The scant votes he did get were probably due to this sole campaign promise, which has never been mentioned ever again by any candidate to anything.

The U.F. goes up and down. If inflation is low, as it is now, it goes down. Great for buyers, bad news for sellers. After many months, a colleague of mine finally got a buyer for a house she was selling. They agreed on the price a few months ago, and then came the ordeal of the actual sale, with the bank loan in between, of course in U.F. Come March 2009, ready to sign the sales contract, and lo and behold: the U.F. was down, the buyer had to pay less, and she was losing out on more than $1,500.

It could have been the other way around: Months ago, the buyer was thinking he was buying a house for a certain amount, but at the moment of actually signing the deal, the property was millions of pesos more expensive, thanks to a rising U.F.

Too complicated to understand, she turned to a lawyer and spent an entire day trying to sort through what the U.F. was doing to her pocket. Fortunately, the buyer didn’t take the house and run, and agreed to pay her the original amount they had settled on for the property. Lucky for her.

 

 

http://www.globalpost.com/notebook/chile/090320/chiles-strange-inflation-rate-tracker