After inflation of 94.8% in 2022, expectations for this year are unchanged. The latest survey by the Central Bank among consultants places them at 96.9%. There are several reasons why the price index will approach 100% this year.
Tax deficit
The Argentine economy has been dragging double-digit inflation since 2006. The escalation coincided with the end of the fiscal surplus and the increase in public spending. Economist Camilo Tiscornia, of the consultancy firm C&T, says that “the main determinant of inflation is the fiscal situation. This includes the issue of the deficit, debt in pesos and the risk of refinancing debt in pesos which imposes a monetary policy rather important problem”.
Problem
For Martín Vauthier, director of the consultancy firm Anker, these high levels of inflation originate in the monetary field. “The deterioration of the Central Bank’s balance sheet can be explained by the sharp increase in the fiscal deficit during the pandemic. This deficit is financed to a large extent with emissions and all those pesos have been absorbed by the Central Bank in remunerated liabilities. Today the Central Bank has the equivalent of two additional monetary bases which accrue interest and which in turn are a source of issue every month”.
Expectations
The price increase is fueled by rising expectations. For Sebastián Menescaldi, of EcoGo, “in recent times a large component of inflation has been expectations. Given a deteriorating balance sheet of the Central Bank, the uncertainty about what the value of the dollar will be generates a rebound in prices”.
Inertia
A large part of public spending – wages, pensions, social benefits – is adjusted for past inflation. And the same goes for private sector prices. The LCG consultancy does its own price measurement and specifies that all prices it does so are adjusted every month and a half.
Economist Juan Manuel Telechea said in radio statements that inflation in Argentina “it is a chronic problem. As the inflation process increases, the behaviors of people, companies and unions are adapting to this environment and are behaviors that are already very difficult to eradicate.”
Drought
As a result of the drought, the wheat harvest has decreased by 50%, a lower production will put pressure on prices and not only in the case of flours and derivatives.
For GMA Capital, the slowdown in food price growth in recent months has been a consequence of the decline in meat prices, which account for about 8% of the total basket. “Due to the drought, the supply of meat has increased significantly in the last two months of the year and, consequently, its price has decreased in real terms.” But while meat was essential so that inflation doesn’t close in triple digits in 2022, “the expected increase in supply will bring more of a headache for the future.”
Dollar
For Tiscornia, “the speed of movement of the exchange rate is a key driver for prices”. In 2022 the dollar lagged, although in the last quarter of the year it accelerated to exceed inflation in December. “Setting a monthly update rate of 6% for the official dollar gives prices a guideline, which makes it difficult for them to move below that level.”
rates
Rates increased by an average of 55% last year and have lagged inflation over the past decade. A series of adjustments have already been made for this year that will impact on prices: energy, public services, transport, prepaid cards, schools are some of the items that foresee increases.
Wages
For this year the Government expects joint ventures to close at around 60%. With the economy virtually stagnant, analysts see little chance of wages putting pressure on prices and rebuilding purchasing power. For Vauthier, “real wages are today at the lowest levels of 2019 and this puts a ceiling on inflation in the short term”.
election year
Political tension surrounding the elections may increase pressure on prices. Added to this is that the campaign could lead to an increase in public spending and the reactivation of a sort of “plan plata”, as happened in the 2021 elections. More public spending adds uncertainty and complicates the deficit targets agreed with the IMF.
Credibility
To bring down inflation, it is essential that the government manages to convince economic and social actors that it is committed to this goal. In the midst of the electoral tussle and cross-accusing, credibility is a rare commodity.
Telechea underlines that the Government “must convince the trade unions and businesses to stop looking back and look forward”. But he warned that “showing a three-month descent path is not enough for that. It is not enough with isolated policies, the only way is to put together a plan”.
AQ
Source: Clarin
