The “falling” inflation that the president spoke of is not only not true: it is not even possible

“We already had a month of December with lower inflation than December of the previous year. Let’s hope that this downward path is sustained,” said the president. Alberto Fernandez after knowing the inflation data for the last month of 2021 (3.8%), which brought the annual figure to 50.9 percent.

Three recent analyzes agree that the presidential statement is not only false, but that it is not even possible for this year. A “baseline” and “controlled stagflation” scenario, such as that of the Equilibra consulting firm, projects 58% inflation and inverts the digits, to rise to 85%, in case of non-agreement with the IMF, which would lead to a circle vicious rise in country risk and exchange rate and inflationary feedback outside the control of the government.

“Inflation in Argentina is not the result of the monetary issue, but the result of many things,” said the president in his amazing celebration of last month’s data, which was lower than the 4% of December 2020, but higher than the 3.7% of the same month of 2019 and included a “core inflation” (measurement that excludes regulated and seasonal prices) of 4.4%, an annualized rate that exceeds 67 percent.

“Without arguments for a drop in inflation” is the title of the latest weekly report from the consulting firm Invecq, which highlights that the inflationary regime in Argentina has already changed, and for the worse. “For 15 consecutive months, core inflation has not fallen below 3% and in a third of the time it exceeded 4% (…) wrong diagnoses or lax measures will be of little use in an economy with a high disorder of relative prices and expectations of the agents, that the lack of an economic program increases for 2022″, pointed out the consultant headed by the economist Esteban Domecq, who recalled that in 2021 inflation in the “Restaurants and Hotels” category was 65.4%, in “Clothing and Footwear” 64.6% and in “Transportation” 57%, although the government insists in loading the ink on “international inflation” and the price of food.

Although the government indicates international inflation and the price of food, in 2021 the items that increased the most were "Restaurants and Hotels”, “Clothing and Footwear” and “Transportation”
Although the government points to international inflation and food prices, in 2021 the items that increased the most were “Restaurants and Hotels”, “Clothing and Footwear” and “Transportation”.

Beyond the monthly data or by item, the engine of inflation is in the fiscal and monetary imbalances, the analyzes of Equilibra, guided by economists, also coincide Martin Rapetti and Diego Bossio, Y Javier Garcia Cicco, professor at the University of CEMA, who in a recent paper highlighted the “persistence” of Argentine inflation.

“Of the last 70 years, in only 13 we had an annual average inflation of one digit; in 40 years we had records of two figures and in 17 of three figures. In addition, in 49 of those 70 years, Argentine inflation was in the top 10% worldwide (among the countries included in the IMF database), including in 15 of the last 20 years. Not only is inflation in Argentina high and persistent, but in general it was, and still is, one of the countries with the highest inflation in the world,” García Cicco said on the Foco Economico portal.

Invecq focuses on the BCRA’s recent decision to increase monetary policy interest rates from 38% to 40% per year (short-term Leliq remuneration). Those 200 basis points would be remarkable in a normal country, but they are very little in perspective: “an increase of 5% compared to increases that ranged from 44% to 700% in other countries of the world.” says the report, adding that The Argentine interest rate was already negative and it would be useless to raise it without a consistent program that explains how the 2022 deficit will be financed. An aspect in which the Government already exposed its nudity when Martin Guzman recognized that the deficit reduction path is not agreed upon. In addition, he highlights, in order for Guzmán’s financing projections to be fulfilled, he needs credit from entities such as the IDB, the World Bank, which he will not have without a prior agreement with the IMF.

An Invecq chart puts the "monetary tightening" of the BCRA by raising interest rates
An Invecq chart puts the BCRA’s “monetary tightening” into perspective by raising interest rates

On the other hand, he insists, it is not possible to show a decreasing path of financing from the Central Bank to the Treasury, as proposed, if the level of deficit is not agreed upon first, which will also depend on the ability to buy international reserves. On average, emerging countries, Invecq specifies, have about 20% of GDP in net reserves, which for Argentina would be about USD 80,000 million. Those of the BCRA are at least 95% below that level.


The report lists 3 “keys” to reduce inflation: 1) close the fiscal deficit, something that the Government does not seem willing to do, 2) de-index contracts, to reduce inertia and not put pressure on future inflation, and 3) stabilize the exchange rate. They all require credibility. But the government only seeks to fulfill the third, at the cost of an exchange trap and amid growing expectations of devaluation.

“Thinking about inflation for 2022 below the current one is just an expression of wish; the stage is not given for this to happen” (Invecq)

“That is why, as the market predicts, thinking of inflation for 2022 below the current one is only an expression of wish; the stage is not set for this to happen”, says the consultant who, like Equilibra, highlights that in 2021, 76% of the fiscal deficit was covered with monetary issue and only 24% with “voluntary” debt, basically tied to inflation and the dollar and with banks becoming more and more reluctant as the year progressed. That is why the 63% coverage with bonds that the minister projects through “positive net financing” operations, as he calls the debt contracted during his administration, and credit from multilateral entities that today looks like a fantasy, seems unlikely. In 2021, highlights Invecq, the government had to issue “about 4.6% of GDP to finance the deficit, a historical record if 2020 is not taken into account, an atypical year.”

Coverage of the fiscal deficit: as 2021 progressed, voluntary financing decreased and the BCRA issue increased
Coverage of the fiscal deficit: as 2021 progressed, voluntary financing decreased and the BCRA issue increased

It is true, he acknowledges, that the first tender in 2022 was positive, because the government placed $114.4 billion, a “roll over” of 206% compared to the $55.5 billion that were due. But there is a lot of seasonality there: in January and February 2021 it did not even need monetary financing. Therefore, he says, “there is little to celebrate.”

hard to get off

According to Equilibra, 2022 inflation will not be able to fall compared to the almost 51% of 2021 due to the forced correction of delayed prices such as the official exchange rate and energy rates. His scenario of 58% annual inflation, he clarifies, presupposes an agreement with the IMF, without which things could be worse. Failure to comply with the Fund would close access to financing from the IDB and the World Bank, would imply the payment of penalties to the Paris Club, serious problems for the private sector and an annual inflation rate of 85%, with the risk of spiraling.

The government insists with its truistic affirmation of the “multi-causality” of inflation. Guzmán and the Secretary of Domestic Trade, Roberto Feletti, They even exposed to the IMF the recent version of the “Careful Prices” program, which includes 1,321 products, as an anti-inflationary leg.

Guzmán, Feletti and Miguel Pesce, 3 musketeers against inflation
Guzmán, Feletti and Miguel Pesce, 3 musketeers against inflation

“If inflation is caused by factors so varied, at first sight isolated, that they affect some prices one month and others the following month, how can it be that the variation average of prices (the trend) is always very similar from one month to another, as if there were a synchronization behind such different determinants?Garcia Cicco asks. The most likely explanation, he replies, is that the evolution of apparently unconnected determinants reflects some common phenomenon. Although at first glance the month-to-month variation in inflation seems to be explained by various factors; average inflation over time has a main cause behind it, which he explains with a sentence of Thomas Sargent (Nobel Prize in Economics 2011): “Persistently high inflation is always and everywhere a fiscal phenomenon, of which the central bank is its monetary accomplice.

In other words, he concludes, The root of the trend in inflation is “how much the government spends and how it finances it.” And on that the Argentine Government continues not to agree with the Fund and with reality.


Leave a Comment