Uruguay has a long history of inflation. The average compound growth rate in the CPI for the period 1950-89 was of 42.8% per year. Levels below the two digits were attained in only three of those years, all of them in the 1950’s. On the other hand, inflation levels in the three digits were attained only in 1967 and 1974. Since 1983 inflation has exceeded 50% per year, a number that even though it seems small when compared with the record of the larger neighbors Argentina and Brazil, is too large to be sustainable for an economy that aspires at maintaining a relatively open financial market coupled with currency convertibility.

The reduction of inflation seems to be one of the utmost priorities of authorities. Several factors are relevant for this objective, prominent among them the fiscal deficit, the degree of indexation of the economy and finally, the gradual process of dollarization that the economy has been experiencing since 1974.

Understanding the inflation process of Uruguay and implementing measures toward reducing the inflation rate requires dealing with all of the above three issues simultaneously as all have a significant role in the determination of the final inflationary outcome and its sustainability.