Can inflation be brought down to 3% a month in just five months as the government proposes?

Among the challenges that the Government will have to face in 2023 is that of recover the purchasing power of real income through a sustained reduction in the rate of inflation.

Economy Minister Sergio Massa said his goal is halve price increases towards April, from an average of 6% to 3%. But how likely is it that such a reduction will be achieved? in just five months?

“The goal is ambitious and is included in a electoral logic clear. The big question is whether it is feasible given the current macro dynamics and the tools available to make it happen,” questions a report from the consulting firm Analytica.

For this, the consultant estimated factors affecting the rate of inflation and its possible trajectory through the macro-financial consistency model.

“The resultado spear that, at best, average inflation can be reduced by 0.5 percentage points, from 6% to 5.5%”.

The consultant’s economists have grouped the factors that operate simultaneously on retail prices into three categories, according to their origin, in order to analyze their impact: the impacts generated in financial markets; the rearrangement of relative prices and the macroeconomic policies (fiscal, monetary and reserve).

Financial market pressure

According to Analytica, in the summer the higher pressures on the price formation process will come from financial markets (such as the dollar counted with lagged liquidity or a possible equity dollar overreaction, for example).

“Among the financial factors affecting inflation, the only favorable is the Central Bank’s sold futures position, which was reduced from US$3,131 million to US$1,339 million between September and October, suggesting lower expectations of devaluation in the short term,” he said.

relative prices

As for relative prices, its evolution is foreseen for the coming months establishes the minimum limit of 5% of the expected inflation rate.

The wages and exchange rate are the most relevant relative prices. In the first case, wage adjustments depend on both past inflation and expectations. After the July-August inflationary acceleration, some of the most important unions recorded annual increases close to 100% from September-October (truckers, banks, among others).

Another official resource to contain inflation is price check, such as the “Fair Prices” programme, which froze the values ​​of around 2,000 food, drink, hygiene and household cleaning items for four months.

According to the consultant, the representativeness of frozen products in the CPI does not exceed 10%. However, he estimated that “immediately, the program can help moderate expectations, with co-ordinating effects that help reduce inflationary inertia. The question is, as always, whether after four months it will be possible to avoid sharp margin adjustments”.

Finally, it is in the more “classic” aspect of macroeconomic policy that the government not only shows greater decision-making power, but also moderates the inflation rate in the coming months. In this plan, the agreement with the IMF is the “road map”, according to the consultant.

​ “Respect for fiscal, monetary and reserve targets shows a positive balance with respect to its anti-inflationary effects. Mainly because get away from a shock scenario, at the cost of reducing the level of activity. In turn, the need to accumulate reserves also reduces exchange rate volatility. On the other hand, its compliance helps anchor expectations. In any case, it should be remembered that the agreement, due to the emphasis placed on the increase in tariffs and the official exchange rate, also shows inflationary components“, stressed the work.

“In summary, of all the factors influencing inflation dynamics, 60% contribute to moderating its speed. But the floor is still high, as the most relevant prices are still at 6% per month and inertia remains the most relevant factor. Breaking this process requires a drastic changing expectations, something unlikely seen next election year. This is why Massa’s goal is to halve the inflation rate by April seems to be a very complex goal to achieve”, concluded Analytica.

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