The government’s mistakes with inflation and the attempt at “tepid stabilization”

After the August data, so that inflation has not accumulated 100% by December, it requires the change in CPI to be less than 6% per month until the end of the year. It is clear why this situation is achieved. Misleading explanations about inflation (the perversion of concentrated sectors or the war in Ukraine, beyond its initial impact on international prices) were fed during the Fernández administration which led to wrong policies (price controls, export closures, useless trusts) and in rude undervalue its effects on family income, corporate profitability and financial decisions.

Since the end of 2020, the delays in correcting the imbalances fiscal and monetary, and the unusual nature of sustaining a permanent reserve drain by different means, meant this the devil kept growing. A year and a half ago, the ruling party still argued that inflation would be 30% per annum, well below the projections of the time and, of course, the final percentage (51%). Two months ago, the futile June-July rush sent private forecasts up by about 20 points higher. In the lack of seriousness of its treatment is the current inflationary dilemma.

With the arrival of Sergio Massa, the economic agenda seems to have turned 180 degrees.

The strong fiscal and monetary adjustment initiated and the logical concern to restore the Central Bank’s dollar liquidity (through a major daily depreciation of the official exchange rate and segmented devaluations, such as the “soybean dollar”) are clear signs of what the government acknowledged the failure in its fight against inflation. The relative calm in financial markets in recent weeks is part of the new record, although in the short term some of them, such as the removal of subsidies or the higher official devaluation rate (at 6% this month) further limit an aggressive decline in indices. in the next months.

There is, and probably won’t be, a standard price stabilization plan for the rest of the administration. But the new approach proposed by Massa, let’s call it that “Lukewarm stabilization”Power avoid an inflationary spiral with very complex political and social consequences. However, while the results of the tax cuts and monetary price tightening take time to mature, theirs costs they are immediate. Part of the success of the Mass agenda on future inflation will lie in it ability and ability to negotiate with the business, social and labor sectors, to which must be said no, while convincing his comrades in government, in particular Cristina Kirchner, that any deviation from the path will mean a return to the gates of the abyss. How to support these tough decisions in 2023, when she faces a presidential campaign, is the big question. The minister’s political fortune is also at stake.

However tepid and even agreed upon the stabilization strategy may be, it will not be viable without also having a clearer picture of the flow of dollars into the Central Bank. Unreservedly lowering inflation is a mission impossible. Logically, the government escapes the classic devaluation leap, as it flirts with expensive and unprecedented exchange rate schemes and strives for a net reserve accumulation goal with the IMF with a reserved forecast. The final amount of dollars in the Central Bank’s cash depends on how determined it is to slow import demand or, in other words, how cold economic activity will tolerate until the end of the year.

The ledge path adds a complex ingredient to digest. If inflation does not go down, there will be no real improvement in income. There is hardly any evidence that real wages can grow with inflation of more than 30% per year.