Of
Francesco Gismondi
Macroeconomic Director of Empiria Consultores.
A very rare phenomenon is occurring, almost by chance, where the prices they determine the evolution of financial assets seems to go hand in hand, such as the regularity races of vintage cars. Inflation, the (official) dollar and the interest rate magically run at 6.2% per month. But it can’t last long.
Inflation seems to have found a new step, after passing from 2% to 3%, from 3% to 4%, continuing to rise with ever faster jumps and exceeding 7%, today it seems to stabilize with a floor of 6% (6.2% in September). It is a tragedy, because when inflation is at 3% per month (42% per year) all prices are updated more or less once a month, but when inflation is at 6% per month (101% per month). ‘year), prices rise practically every week (in a hyperinflation they increase daily or more than once a day). Inflation drives many financial assets indexed by what we call CERs or UVAs, which are basically the same.
The devaluation of the official exchange rate (which would be the loss in value of the peso, but we will talk about the increase in the price of the dollar for better understanding) was 1% almost all of 2021 (election year), where in a populist way, to improve electoral chances the exchange rate which was well below inflation was delayed. In 2022, daily devaluations accelerated and slowly climbed the steps, running after inflation, delaying the change (accumulating almost 30% of delay in less than two years), but in September the devaluation finally managed to link up with inflation, another 6.2%. The official devaluation leads to assets we call Dollar Linked or Dollar Futures, among others.
The interest rate, also at a crushing loss, where a fixed term (unadjustable) or a Leliq lost to inflation and many loans also had rates below inflation. In September, after the ninth rate hike of the year, which combined added 63 percentage points of actual hike, it also managed to match inflation. The minimum interest rate for retail term deposits of large banks (yes, minimum, because in Argentina things are regulated in the most unlikely way), after remaining throughout 2021 at 44% per annum (in effect), it increased 9 times a year from January to September, reaching 107% effective annually (6.25% monthly). The interest rate determines what happens with some bonds such as LEDs or even traditional fixed maturities and Leliq.
The other relevant variable for the financial market is the parallel dollar, but its volatility is much greater, the race for regularity certainly loses it. When it accelerates it overtakes everyone and when it stops it can even turn back. The parallel dollar (in Argentina there are more exchange rates reaching around 14, but the most relevant for the financial market are the MEP, the CCL and the Blue) which he has been calm for a while today, he can plow at any time, although not easy to hit whenArgentina’s disease is called chronic fiscal deficit, the most permanent symptoms are inflation and debt, and the fever is represented by the free dollar price.
So the film shows that although inflation has already taken a turn for all of them, especially in 2021, now they go together, at the same speed. Those who have just arrived on the grandstand may think it is a stable balance, but it is not. Nothing guarantees that this will continue like this for very long. In fact, that balance will most likely be short lived and the next round will show them separating again.
Also, another problem is speed. Because regularity races are usually at low speeds. Nobody can think of regularity races when they run downhill. Either one of the riders presses the brakes and falls behind or one of them accelerates and leaves the others behind for a while. When the dollar accelerates, it pushes inflation, whereas when the rate accelerates, inflation tends to slow down. And it is not irrelevant at what speed they are the same, the more everyone runs, the worse for people and especially for those with less.
Moving forward and especially with the election year that is about to begin, in the range of possibilities we can highlight two scenarios at the ends: one more moderate and one “populist”. Moderation is what the Minister of Economy has been trying to do (or at least announce) since he took office, trying to meet the goals with the IMF, especially the fiscal and reserve targets, and reducing the issuance. supermonetary of the previous months, things strongly contrasted by the populist DNA. The populist temptation ahead of the elections It would slow down the dollar and the rate, as well as stop the rate hike and push wage increases, a cocktail that with sudden slowdowns and accelerations would end up generating more inflation again.
If the scare does its job and the moderate version advances, it is possible that inflation will stop rising, the interest rate will remain the same and devaluation as well. The current unstable scenario of regular high-speed racing may continue for some time. On the other hand, with more populism, “cheap” plans, generous state parities, lower rates and a more backward exchange rate, inflation will once again be the winner and take another turn for everyone. .
But in no case is a slowdown in the economy expected in all variableshigh speeds are here to stay for now and 2023 will not be a year where the brake is widely used, at best we applaud that speeds are at least similar.
There are a more real variable that is also measured in that career: salaries. Because if wages accompany inflation, inflation suffers less. But unfortunately they have been losing against prices for a long time, including formal wages (public and private) which are the most dynamic, every time they want to catch up, inflation recedes again. When inflation accelerates, wages lag behind and only when it slows can they recover. The outlook for the next few months is also not good.
But when it comes to looking for matches, there are happier ones in the face of the next World Cup. A prominent economist just posted on Twitter a potential coincidence that if it were to occur would be more surprising higher than 6.2% for the 3 financial variables or any of the beer advertising variables: 12-month inflation known before the 1986 World Cup (May) was 87.4% and for that known before 2022 l inflation is exactly the same, October inflation needs to be 6% per month, not very far from what reality indicates (it’s a little above, but not that much). Repeating as the tweet that reveals the coincidence ends: I choose to believe!
Source: Clarin
