The statement by President Alberto Fernández that the inflation is “self-made”.“contrasts with the numbers that show how the sustained jump in prices is the consequence of a “sick economy” – as Minister Sergio Massa defined it. These are the factors that push the price index close to 100% annual.
Argentina’s inflationary escalation began in 2005, when increased public spending began to complicate fiscal accounts until they plunged into a permanent deficit that has no real funding. The increase in spending was covered with monetary issuance. increased tax burden and new debt.
The Central Bank machine became the main source of financing for the public sector. In 2022 alone, the dumping of emissions on the economy was excessive 6.2 trillion pesos. With the currency depreciating daily, nobody wants those pesos, which leads the Central to raise rates to make them more attractive and at the same time floods the market with bills, which ends up putting pressure on prices.
The Journey of the Dollar
When Alberto Fernández took office, the official dollar was trading at $60. Today the wholesaler stands at 184 pesos. He jumped 206% below inflation for the period, which reached 300%. To correct this exchange rate lag in recent months, the Central Bank accelerated the rate of devaluation to put it in line with the monthly evolution of prices. Therefore, with a monthly correction of around 6%, it sets a floor for inflation.
The government’s attempt to use the dollar as an inflationary anchor and race after prices has resulted in a dollar range that has strengthened in recent years.
This makes itExchange rate gap exceeds 106% in the case of the blue dollar and reaches 97% in financial dollars. The size of the gap suggests that at some point there will be a correction that will bring the price of the official dollar closer to that of the alternatives. And that means that prices are set taking into account the price of blue and cash with liquids.
Spending and debt indexation
Most government spending is adjusted for inflation. Rising prices affect the rise in pensions, and public and private parities are set on the basis of past inflation. The same happens with other expenditure and debt items: bonds and instruments that comply with the CER are the most requested by investors, who are increasingly asking for a higher rate to stay in pesos and not go into dollars.
The shortage of foreign currency
With debt markets closed, Argentina faces a permanent exchange rate deficit. Not even record exports are enough to generate the dollars the country needs. Faced with this, the government’s solution has been to block imports and multiply stocks so that it is increasingly difficult – and more expensive – for Argentines to get dollars to save or travel abroad.
As of December 2019, those wanting to travel outside the country paid $63 per dollar. Today pays $383, a leap of 508%.
In election years, Argentines tend to turn to the dollar to hedge against uncertainty. This element, combined with the attacks of the ruling party against the Supreme Court and the clashes with the opposition in Congress, increases the pressure on prices and fuels the inflationary inertia that the country has been dragging on for almost two decades.
Charles Arterburn is a seasoned business journalist for News Rebeat, where he provides comprehensive coverage of the latest trends and developments in the world of finance and economics.