Given the new price deal announced by the government, economists warn that the chances of it working are slim, between a sustained rise in the exchange rate and rate hikes.
“This type of deal is something we’ve tried time and time again. The Precios Cuidados program has been in place without interruption since 2013. That year, annual inflation was 25% and poverty was 26%. Inflation to close above 100% and poverty at 40% in 2022”, said Eugenio Marí, chief economist of the Libertad y Progreso Foundation.
Marí stressed that products that freeze their prices for four months “they will lag relative to the consumer price index (CPI) by 27%“, because monthly inflation of 6% or more is expected between December and March 2023.
For Marí, “the most worrying thing is that it was announced in a vacuum. There is no major fiscal or monetary program that improves fiscal sustainability and generate expectations that the Argentine state will be able to service its debt and dispense with the monetary issue as a financing tool”.
“That makes the price deal it has less credibility and, consequently, its impact is reduced. Also, in this case it is related to the fact that companies will be able to import at the official exchange rate, an exchange rate that is not clear that the Central Bank can defend for another four months,” Marí said.
For Fabián Amico, coordinator of the Institute of Worker Statistics (IET) of the Metropolitan University of Education and Labor (UMET), “this freeze can last in the very short term. Three months seems too much to me.”
“It is very difficult to freeze when the nominal exchange rate is growing at 6.5% a month, we have utility tariff increases ahead of us and, moreover, parities are open,” said Amico.
“There is no experience in the world of a stabilization plan when the exchange rate rises to 6.5% which equates to a 100% dollar price adjustment,” Amico said.
For Camilo Tiscornia, director of the consultancy firm C&T, “if prices moved to 4% it would help to lower inflation a bit given that prices are currently above 6%, but history plays against it. It can work in the boot , but if macroeconomic conditions don’t change, prices end up being fair and the deal ends up not working.”
Referring to the history of the price agreements, Tiscornia recalled that “a year ago Feletti was with these agreements and so we went from 3-odd monthly inflation to 6-odd. It might have some short-term effects, but I don’t see it lasting.”
The only possibility for it to work would be that “the government is thinking of achieving fiscal consolidation. But if the deficit does not adjust, the promise not to issue will not be sustainable. These agreements could be a complement to more fundamental measures, but they are not the solution“, summed up Tiscornia.