Three-digit inflation opens the door to new instability

On August 3 of last year, President Alberto Fernández swore in Sergio Massa as the new Minister of Economy. And from minute 1 of his administration, people began to talk about “super-minister”. The nickname was not just symbolic. With the modification of the Law of Ministries Massa would take charge of a portfolio that unified Economy, Productive Development and Agriculture. And at the same time, he came to the position with a series of special powers. In total, 76. A blank check that the battered Fernández administration ceded so that he can do, undo, touch and retouch everything he needed with the clear objective of accommodating the macro.
After the resignation of Martín Guzmán from the Economy, a frantic July arrived, in which the management of Silvina Batakis did not step forward and expectations skyrocketed. Inflation, which already ran at 5% in May and June 2022, jumped above 7%. The sensation of an economy running without brakes and without prices was palpable.

And the stocking and the remarking of prices anticipating future increases to face replacement costs were day to day. The economy was crashing. In some sense, Massa’s entry and his portfolio of powers will lower tensions, calm down economic agents and resolve to “sell” the idea that it was possible to stabilize the macro economy. Support from abroad and meetings with multilateral credit organizations also added.

But at the beginning of 2023, and in parallel with the World Cup fervor, the lack of a consistent plan to contain the rise in prices began to be visible, the main decomposing symptom of a domestic economy that claims to be healthy. The CPI data for February -6.6%- which was added to another similar one in January and which raised year-on-year inflation to triple digits with 102.5% re-installed the idea that little was done on this front.

Especially when there are still contained regulated prices. And when this value is analyzed inwards from its dimensions, it also exposes that those who suffer the most from the rise in prices are the lower and lower middle classes.

The three inflations. The economist José Simonella delves into and explains this much-commented idea that the lower classes are the ones who suffer the most from inflation, something that is clearly seen when analyzing the evolution of the Total Basic Basket -with which the limits of people are determined in the poverty line – and the Basic Food Basket – to determine the limits of indigence.

“When we say that inflation is one of generating poor people, it is because that is what is happening. With the February measurement we can see it clearly. Those of us who are fortunate enough to have a relatively balanced basket of goods and services face inflation of 6.6%, according to the February measurement. But Alimentos ran at 9.8% and in the last two months it added 17.2%, a very relevant number ”, he comments.

And he points out that Annualized annual general inflation was 102%, but that of food was 108.4%. “The Total Basic Basket, which measures poverty, has a year-on-year rise of 111.3%, but the Basic Food Basket, which is what people in poverty come to buy, added 115%. There we see how it affects those who have less the most. There we see how this hits people with fewer resources ”, he maintains.

Natalia Calcagno, sociologist and coordinator of the Colsecor Basic Food Basket study, remarked that significant increases were observed in February during the summer of last year and in these first months they do not seem to slow down. “Regarding the differences between the localities, heterogeneities are observed that are not explained either by geography or by the provinces, with differences of around $8,000 between the highest basket and the cheapest.”

The economist Maximiliano Gutiérrez, from Ieral, contributes: “inflation does not affect everyone in the same way. Until the middle of last year, with State and additional aid, the lowest deciles of the social pyramid alleviated inflation somewhat and compensated for the drop in purchasing power. But in recent months and with the strong acceleration that we are seeing in food, the poor population is being greatly affected. The acceleration in these areas impacts them much more fully because they are the ones who allocate more of their income or all of it to the purchase of food.”

As follows. With regulated and seasonal prices still behind, what is expected is that inflation will continue to escalate. The key data jumps when looking at core inflation, a purer record that does not include regulated or seasonal values. Mark 7.7% in February.
The point is that, how it is marked, both the rates of public services and the exchange rate itself still lag behind.

“The inflationary acceleration detected in the latest data generates complications for the management of the macro, regardless of the political significance of the return to the three-digit dimension in the year-on-year measurement. Among the inevitable derivations it is necessary to contemplate the expectation of an acceleration of the “crawling peg”, due to the lag of the exchange rate against inflation and, on the other side of that same “counter”, the perception of the need of the Central Bank to raise policy interest rates again, to keep them positive in real terms. While these variables adjust to the new scenario, instability may worsen”, marks an article prepared by Gutiérrez.

in dialogue with CORDOBA PROFILE, expands: “inflation is not going to slow down in the short term, we do not have a precision program, the only thing that there is is a Care Prices program that has a low incidence, but mainly does not serve to anchor expectations. It is not part of a security plan that also attacks the monetary part and the fiscal part. It’s a bottle of water in the desert.”

“Let’s not think of an increase in inflation, but if this dynamic is consolidated, the Central Bank will be forced to accelerate the crawling peck -the evolution of the exchange rate- because if it allows the exchange rate to lag, it creates a problem for you on the side of the trade balance, in a context where the drought has already hurt you a lot”, he defines.

Simonella agrees that inflation will remain high because the government has not taken any measure to curb it and because issuance continues, both to sustain public spending over revenue and because the Central Bank has to issue to maintain the price of the bonds. “He bought more than two trillion pesos in bonds that the private sector wanted to get rid of. For that issued. To make matters worse, the differential dollars that are created, for the purpose of improving reserves, such as the Soybean Dollar 1, the Soybean Dollar 2, the Malbec Dollar to cover the difference demand more issuance. So the emission, which is the main fuel of inflation, is still there, ”she marks.

political noise. The combo is completed with the political tension, to be expected in a year of calling the polls.

“The bids within the governing coalition are so great that nobody wants to take charge of the problems. There we see inflation and insecurity and attempts to break away. Some achievements, such as the negotiation with the Fund to lower the requirements, highlighted new criticisms and it was even suggested that it is convenient to default on the Fund”, says Simonella.

-A 3-digit inflation, in this political context, opens the door to a new stage of instability?
-Yes Yes. Because in addition to returning to a stage of instability, the government seeks to detach itself from the situation and it is difficult to find someone to take charge. And there is a long time left for the end of the government. The panorama is going to worsen because the social situation is tense, the income of workers, whether formal or informal, is eroded by inflation, which does not subside. It’s a tricky combo.

-There are no tools for an anti-inflationary policy either.
-You cannot generate a change of expectations when you do not have credibility. The fundamental condition to change expectations is to have credibility. Here the government makes an announcement today and then vanishes. It happened with the debt swap, we have to see if it was good or not, but it ends up diluting. You have to have credibility and political power. The rumor of defaulting cannot return again because it is very difficult to carry out economic policy in this way. The disagreements within the ruling coalition make everything more difficult. Inflation cannot be combated in Argentina if we do not lower public spending and if consumption continues to be promoted. We need politicians who have a plan to speak clearly, to say that they have to make an effort. If we had done it a few years ago, that effort would have been less than the damage that this inflation is doing to us.

March, another hot month
March is usually a month with higher inflation due to the adjustment of Clothing due to the change of season and of Education due to the start of classes. Likewise, for this month more adjustments are expected in regulated: private schools (16.4%), prepaid (between 5% and 7.7%) fuels (3.8% that has just been given) trains and buses (6 %) domestic service (4%); Gas increases according to user income will be between 39% and at least 50%; and in water the increases according to geographical area will operate between 15 and 20%.

cost inflation
Regarding the so-called “Cost inflation”, which involves the evolution of rates, salaries and the exchange rate, increasing pressure can be expected, since from the end of 2018 to date a “repressed inflation” of 20.2 has accumulated. % “This is the difference between the rise in consumer prices in the last 50 months, which was 596.2%, and that of the basket made up of the official exchange rate, wages and tariffs, which registered a variation of 479.1% in the same period”, points out the Ieral.

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