By Rodrigo Martinez
SANTIAGO (Reuters) - Flanked by lettuces at his stand at the Chilean capital's largest open air market, Pedro Munoz says inflation at 14-year highs means new clients for him as they turn their backs on costlier supermarkets.
"Things aren't going too badly for me, but the economy is in bad shape. Just watch the news, it's catastrophic," the 65-year-old said, bemoaning sharp rises in fuel and food prices stemming from abroad.
Used to annual inflation of around 2.0 percent in recent years, June's 12-month figure of 9.5 percent has prompted many Chileans to talk of economic crisis, prompting President Michelle Bachelet to try and convince people there isn't one.
The central bank has raised its benchmark interest rate to 7.25 percent, the highest level in nearly a decade, in a bid to curb inflation running at three times the bank's target of 3.0 percent over a 24-month horizon.
Inflation is one reason Bachelet's approval rating is depressed, and if it worsens may help displace the centre-left coalition that has governed Chile since Augusto Pinochet's dictatorship ended in 1990 at elections next year.
"(Public) perception of the economy has grown increasingly pessimistic," said Carolina Segovia, a researcher at pollster the centre for Public Studies (CEP).
"A few years ago, inflation had practically disappeared as a leading problem and is resurgent now," she added, saying issues like crime however continued to be bigger worries.
The pessimism is a stark contrast to windfall profits thanks to high copper prices, which have pushed the fiscal surplus to record highs. Chile is the world's largest copper producer.
"I used to go more to the supermarket," said Marisol Diaz, who like other housewives from upmarket neighbourhoods is opting for cheaper open air markets.
Supermarket sales in the Chilean capital fell 6.4 percent in June compared to a year earlier, according to National Chamber of Commerce data.
Commenting on economic data, Interior Minister Edmundo Perez Yoma this month urged the public to "grit its teeth".
ECONOMY STILL GROWING
Chile's economy is still growing at a decent pace, with both the government, the central bank, analysts and the International Monetary Fund expecting GDP growth of over 4.0 percent this year after an expansion of 5.1 percent last year.
The economy has not contracted since 1999, during the Asian economic crisis of that year.
Finance Minister Andres Velasco is quick to highlight buoyant 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 of employment. The headline numbers continue to be good."
"While many salaried jobs are indexed to inflation, a significant percentage of the population does not have that safety net, and does generate a significant fall in disposable income which we haven't seen for at least 10 years."
Correa does not expect to see inflation converge with the central bank's 3.0 percent target until 2011. Santander forecasts inflation of 7.1 percent for 2008.
According to CEP's most recent poll, 52 percent of Chileans disapprove of the government's handling of the economy. The same poll found that centre-right opposition leader and investor Sebastian Pinera would win next year's presidential election if it were held now. Bachelet cannot run for a consecutive term.
Segovia believes inflation could have an impact on the election if it continues to quicken, but believes it could lose relevance if it eases.
The government has injected $1 billion (500 million pounds) into a fund to help cushion fuel price increases, given Chile must import nearly all of its fuel needs and is suffering an energy 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 waited to fill his pick-up truck. "You keep adding the patches, but you know they will eventually fall down."
