PRICE INDEX SPAWNS A REAL CRISIS

MICHAEL KEPP

RIO DE JANEIRO, Brazil (FNS) -- Brazilian supermarkets are in a state of turmoil. Afraid the government's new price index will result in revenue losses, store operators are rapidly raising prices. The government, in turn, is threatening to crack down on supermarkets guilty of price abuses.

The new price index, called the Real Unit of Value, or URV, is part of the government's bid to curb inflation, now at 40% per month, and stabilize the economy.

The URV, which was announced Feb. 28, substitutes for 11 separate past indices. The URV is pegged to the U.S. dollar to keep it from being eroded by inflation, and it will convert into a new dollar-pegged currency called the "real" in 60 to 90 days.

As of March 1, the government converted all private and public-sector salaries to URVs. It said private-sector price conversions to URVs would be voluntary.

Most of the private sector, especially retailers such as supermarkets, has kept prices in "real cruzeiros," the local currency.

The Central Bank devalues the real cruzeiro daily in relation to the URV to keep up with inflation. For that reason, the price of an item in URVs shouldn't change, though it should change in real cruzeiros. Under the URV system, the government expected prices to fluctuate following market trends and eventually drop (in part due to lower URV-adjusted salaries). The reverse has happened.

In the last few weeks, supermarkets have been raising prices at such a pace that food products feature an array of outdated price tags. The reasons for the price hikes are: · Continued inflation, still at around 38% per month.

· Price markups by suppliers.

· Price speculation on the part of suppliers and supermarkets.

· High interest rates.

Another reason supermarkets have been among the quickest to raise prices is their relationship with suppliers. Since the URV was announced, some suppliers and wholesalers have been selling goods to supermarkets in URVs, which the supermarkets convert into real cruzeiros. Since the URV-real cruzeiro relationship changes daily, supermarkets have to mark up the suppliers' price in real cruzeiros to reflect the changing price relationship. Wholesalers used to give supermarkets deals on certain products, but they have stopped out of fear that a surprise government price freeze would lock in the discount or bonus price.

"With the URV, the relationship between supermarket wholesalers and the markets they sell to has become much more complicated," said Paulo Camillo Penna, assistant to the director of the Brazilian Supermarket Association. "As such, recent supermarket markups are a combination of both increased inflation and increased uncertainty brought about by the URV."

Economic uncertainty also led supermarkets to remark prices ahead of the URV program. In some Rio de Janeiro supermarkets, coffee prices went up 55% in the 17 days preceding the URV decree, which reflected similar wholesale-level price increases. A week after the URV decree, virtually all other supermarket products also increased in price by at least 20%, and in some cases more than 100%. Black beans, a staple here, showed the sharpest price hikes. In Rio de Janeiro, black bean prices rose 68% during the first three weeks of February. One week after the URV decree, the price of black beans in some Rio supermarkets jumped from 60 cents per kilo to $2.85 per kilo, an increase of 375%. The extraordinary increase in black bean prices, however, also was due to a bad harvest and low government regulatory stocks.

"The press has been reporting big markups in some goods, like black beans, without reporting why those markups are occurring," said Nelson Veiga, a director of Paes Mendonca, Brazil's third-largest supermarket chain. "But the press needs a villain and, because the cost of basic foodstuffs hit the poor so hard, supermarkets have become the fall guys."

Shoppers have been showing outrage at the price hikes. Virtually all the newspapers and the nightly news programs feature shots of indignant housewives waving goods before the cameras.

As a result, the government has promised to lower import tariffs on certain goods -- from around 20% to 2%. Though the government said those oligopolies would have to justify the price hikes, it has little legal recourse to punish offenders.

"Supermarkets know that they can get away with charging not what's fair but what the market can and cannot bear," said Yvette Prado, a middle-class Rio housewife. "I use to stock up on supermarket food as soon as I cashed my husband's paycheck as a hedge against inflation. But nowadays, the price of this food is being so quickly marked up that stocking up doesn't do any good."