What are we talking about when we talk about inflation?

What is the origin of this word? It comes from the Latin inflatio whose meaning is related to the “action and effect of inflating”, in this case, to inflate prices. In Latin or Spanish, many Argentine governments have had to fight this problem, the best known on this front being that led by President Raúl Alfonsín, the first democratic government after the 1976-1983 dictatorship. Among the most recent administrations, President Néstor Kirchner had just 8.5% year-on-year when he left the Casa Rosada in 2007.

On the other hand, and continuing with the radiography of the males of the Argentine economy, why is the cycle of appreciation of the exchange rate generated? It is produced by the relationship between supply and demand that can be generated by an increase in the excessive supply of money or by a sudden decrease in demand for it.

Going back to review from the beginning, it should be noted that during 1989 hyperinflation is well explained in this graph that analyzes it since 1975, the government of Isabel Perón, and the military government. It is a comparison between the regular increase and the hyper already in the course of the years 80/89.

The problem is so deep and has been so established for decades that it became one of the characteristics that definitely not only affects our economy but also the image of the country abroad. That famous question “how do we come abroad?” it is responding less and less with references to soccer and barbecue and more and more talking about unleashed prices. In its October 8, 2022 edition, the British newspaper The Guardian came to publish a “photo-essay” on inflation in the country in which it appeared, for example, an Argentine papering one of the walls of his house with banknotes. ten pesos, “which is cheaper” than buying wallpaper rolls.

“How much?! The absurdity of inflation in Argentina”, is the title of the article by the reporter Naomi Larsson, according to which “the country is experiencing the highest annual inflation in thirty years, accelerated by the Covid-19 pandemic, the reduction of supplies world food shortages, rising energy costs, and the economic consequences of Russia’s war against Ukraine.

Agency Shutterstock

“While the rest of the world is forced to cope with skyrocketing prices, there isn’t a major economy that understands how to handle life with inflation better than Argentina,” Larsson adds. It is a reality that Argentines have been living with for much of the last half century; today, the country’s central bank continues to print money to account for the relentless fiscal deficit, while owing billions of dollars even to the International Monetary Fund.

In any case, Argentina is in an electoral year and, once again, the possible recipes to control this economic beast that has the country under its shadow are made known. With an optimistic spirit, PROFIL consulted various political and economic referents about their keys to be able, once and for all, to successfully face inflation.

Martin Tetaz, UCR-PRO national deputy, told us:

We have to do what all the countries in the region did, it cannot be that Argentina cannot solve it. Paraguay, Chile, Colombia did it: the ideology does not matter, it is a technical question, not an ideological one.

Point number one is the total independence of the Central Bank, the president can no longer appoint his director. That will mean that the Treasury will not be able to finance more from there.

In addition, it is necessary to go to an exchange unification. Depending on the reforms, you can go to today’s official exchange rate or the parallel dollar exchange rate. A tax reform is also necessary, because currently it is taken from production, exports, and it is taken from employment.

A reform of the state is also needed, reducing the mechanisms of privilege retirements. And finally, convertibility with the real. Just like we did with the dollar (in the ’90s) but with the real, that’s how inflation ends in Argentina.

Inflation through the roof: Argentina has the lowest value banknote in the region
inflation. Photo: Telam

Marcelo Ramal, economist at Política Obrera, contributed:

Existing inflation must be socially characterized, that is, as “benefits inflation”. The clearest example of this is the public debt in pesos, which the government has indexed or dollarized; then, the issuance – between September and last December – of 1.9 trillion pesos to rescue the value of the devalued debt securities. The correlative “de-indexation” of salaries and pensions makes inflation a confiscatory instrument, and the core of the current fiscal adjustment.

It is necessary to put an end to the burden of a public debt that, when collapsed, is artificially valued at the expense of the population. A consciously and socially regulated economy must reorganize the economy from the interests of the world of work. Through their action and control, an economic order must be established that is based on the interest of those who live from their work.

And Matías Surt, economist from the Civic Coalition, said:

There is no way to contain, much less lower, inflation if the fiscal imbalance, which is what generates money in an economy without credit, is not decisively attacked. Therefore, to lower inflation, the necessary reforms will have to be made to achieve and maintain a balanced fiscal situation over time. That is the basis.

But it is also true that, in the short term, regardless of what begins to be done in the fiscal-monetary sphere, the price correction has a relative impact on the inflation rate. Rates, dollars, controlled prices of various goods and services for mass consumption, are all the variables that are going to have to be aligned for the economy to function correctly.

The key is in the sequence of actions on both fronts. The faster the fiscal plan is ordered, the less “dangerous” in inflationary terms will be the changes in relative prices. But it is also true that there are relative prices that need to be changed to make fiscal savings (such as rates), which speaks of an interdependence of the variables that is key.

One element that will play in our favor will be the compression of the exchange rate gap. Parallel dollars are very high, largely due to the great mistrust generated by the government and that will change with a change of government. The narrowing of the gap will reduce devaluation expectations and, therefore, inflationary expectations.

It is probably opportune to live for a few months with an officially split market, until the trajectory of fiscal and monetary ordering is clearer and can be internalized by the public.

And a third plane on which work should be done is some salary coordination. The government must mark a downward path for the inflation rate so that salary negotiations are not uncoordinated and go down a path that is inconsistent with the rest of the variables.

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