Taxes, education and transportation; lagged prices that will add pressure to inflation in the coming months

After December’s inflation shock, which at 25.5% was the highest in a month in 33 years, some data show that prices, particularly food prices, started to slow in January. While this opens the door for this month’s index to be slightly lower than the final month of 2023, other indicators show that There are areas that will continue to apply pressure in the coming months.

What happens is that a strong distortion builds up between different prices in the economy. In the four years of Alberto Fernández’s management accumulated inflation was 1,146%. Clothing and footwear was the item that recorded the greatest increase, with 1467%, followed by Restaurants and Hotels with 1402% and Food and drinks with 1362%. But other segments increased much less. The furthest back is the one that groups together the rates with 577%followed by Communication with 602% and Education with 744%.

If you look at the numbers from the last year, the trend is similar. GMA Capital notes that in the comparison of the last 12 months, Food and non-alcoholic beverages, the sector with the greatest impact, was the item that became more expensive, with an expansion of 251.3% per year. At the other end of the spectrum, Education (141.7%), Housing, Water, Electricity & Other (149%), and Regulated (164.9%) were the items with the lowest relative face value.

“The use of regulated markets as an inflation anchor has been common practice over the past four years, but it has generated important distortions that require considerable effort to correct. Strictly speaking, “To adapt to the evolution of core inflation since August 2019, the regulated component should record a real increase of 72%”notes GMA.

“If the relative price is to improve, the increase in rates must be greater than the average change in price. This dynamic will impact inflation. Once again we are faced with this challenge, trying to ensure that the reduction of subsidies contributes to the elimination of the fiscal deficit expected for the year under the agreement with the IMF,” says Nadin Argañaraz, director of the IARAF.

The update of tariffs and other relative prices will hit wages hard, which had already seen their purchasing power reduced by around 15% in December. For Matías Surt, economist at Invecq, “if you think in terms of purchasing power, I would say that there is no space to recompose rates, but there must be space because it is not possible to launch a stabilization program with distorted relative prices. And the government is very clear on this.”

“Just as December was a month of asset inflation, The next few weeks and months will be about services inflation. With these levels of inflation it is not possible to think of a gradual strategy for reorganizing relative prices. It seems to me that all this should be done in the first half of the year and from there launch a stabilization program”, reinforces Surt.

Economist Invecq points out that goods prices surged in December driven by devaluation, but warns that “It is not guaranteed that the assets will move towards a dynamic of absolute stability. “Although the exchange rate is quite stable, market access for importers continues to generate supply complications.”

For Aldo Abram, of the Libertad y Progreso Foundation, “there are several factors that will keep inflation high in the first quarter. One is that The destruction of the value of the peso takes four months to be reflected in all goods and services in the economy. So we will still pay the consequences of everything that was enacted in the previous administration. What justifies this is the fact that regulated prices need to be updated to reduce subsidies In the first quarter we will have inflation above 50%. Only in the second half of the year will all prices be corrected and we will have inflation levels below 5%.”

Of Ecolatina, Santiago Manoukian points out that “The alignment of relative prices has always been a necessary condition for the success of a stabilization program. And the government’s intention is to concentrate these adjustments in the early part of the administration, when political capital and public support will be greatest.”

Manoukian acknowledges that amid the economic crisis, deepening the adjustment will be complex. “Limitations appear on different sides of governance: The management of social conflict through the relationship with trade unions and social movements appears as a source of uncertainty how society will tolerate such an adjustment.

Manoukian specifies that in the case of tariffs “it has already been said that it will be something gradual. It’s not that they want to eliminate subsidies in the first year, what they are looking for is to adjust 0.5% of energy spending and 0.2% in transport” .

“In other cases, such as fuel, much of the shock has already been done, while other sectors such as communications are far behind and it remains to be seen how education will adapt, but clearly The logic is that they must exceed the average. If monthly inflation is 25%, it has to increase more than 25%, that’s the point,” Manoukian points out.