The Central Bank had to resort to the issue to support the soybean dollar.
With August data at 7%, the cumulative inflation of the last three months stands at 21%, surpassing the quarter March-May 2002 (after the devaluation of 3 to 1), and becoming the high post-hyperinflation record. Means that in just 11 months the prices double.
Inflation on an annual basis, compared to August last year, is already just under 80% and the annualized at 127%. For all of this, we are in a position to affirm it we enter a new step of inflation, which lies between 5.5% and 7.5%of which it will be difficult to get off
There is a greater risk: that of participate in a nominal tender where the prices of goods and services, the official exchange rate and interest rates run increasing speed and deposit us in an even higher nominality step. Something like a car race, which we can call “The great price prize”.
Let’s do some history. In January of this year, the exchange rate was running at an effective rate of 30% per annum, while the interest rate (Badlar) was just above 40% and inflation (the CER index) was just less than 60%.
Four months later, the exchange rate was running at nearly 60%, with the interest rate just relegated to 55% and inflation accelerating to 80% annualized.
In August the exchange rate grew 95% annualized, the rate was 80%, and inflation, as we have seen, was over 120%. That is the nominal race, which has not yet seen the checkered flag.
The inflation figure for August comes with the aggravating circumstance that, subsequently, the annual growth rate of the exchange rate has continued to accelerate, comfortably settling above 100%.
Furthermore, from September a new fuel not present until now is added: that of regulated prices. Recall that, in the bad data of August, regulated prices continued to drop the average number, growing by 6.3% monthly vs. 6.8% core inflation and 8.7% seasonal.
But It will never be the same with rate hikes of public services, which will be reflected in the next issue. I’m two anchors that are lost.
“The grand prize of prices” also has a inertial component which is very difficult to cut. With inflation this high, the the volatility in the rate of price growth thus becomes high which is a lot Difficult to form expectations. Not to overestimate, what happens then is that indexing terms are getting shorter.
In this sense, the consulting firm Econviews has shown very interesting information that has to do with the How often are salaries reviewed? for some unions. Trade and UOCRA updated salaries 9 times so far this year (1 per month), while UOM and Gastronomicos have done it 8 and 5 times respectively. Last year, the average overhaul of these unions was 3.5 times and in 2020 only 2.5 times a year.
This nominal race can be seen as a manifestation of the multiple goals that are imposed on economic policy.
In particular, we count at least three: contain the dollar in parallel, it meets the goals with the IMF and meet the expense requests within the coalition.
In other words, inflation is an endogenous variable in this model, which is determined in relation to the degree of satisfaction of these three conditions.
Loosening the constraint of containing the free exchange rate would be equivalent to being less aggressive with the interest rate, preventing the growth of the quasi-fiscal rate totally discounted by agents from causing more accelerated price dynamics.
The difficulty that arises at this time is that of the positive effect of expectations on liquidity with liquidity it would seem worn out after the first announcements of the leadership of the new minister. From now on, a favorable evolution of the free exchange rate will be required fewer ads and more results, so it should be the interest rate effort to keep the dollar calm growing over time if this condition is not relaxed.
Being less meticulous with the letter of the program with the Fund would allow the crawling-peg to slow down a bit, to cut the acceleration of prices that refer to the official exchange rate (remember that the IMF has asked not to delay the exchange with respect to the December level of last year).
The pressure to reach the reserve target also leads the government to implement imaginative instruments, such as the temporary deployment of the “soybean dollar”which has a phenomenal expansive monetary effect (more than 25% of the monetary base will be injected in one month), which promotes “the grand prize of prices”.
Finally, the containment of the expenditure demands of the various government sectors would make it possible to reduce the budget deficit more quickly and, in this way, cut with the main fuel of the maximum nominal: the problem of weights
Although there is no longer direct assistance through advances, there is indirect assistance with a split which is equivalent to eliminating withholdings and bridge the gap in the Treasury by issuing pesos.
The solution is not easy, but a correct approach would be to start last, loosening the third constraint. A little more fiscal adjustment overwhelming It would, in turn, allow us to be less aggressive in monetary adjustment, easing the first restriction thanks to the fact that the fiscal signal would help keep the free exchange rate calm. Coordination between fiscal and monetary policy would be healthier.
This would increase the chances of ending this nominal run, which would allow the real exchange rate to slow down (and ultimately not completely), but for good reasons (deceleration of inflation) and not for bad reasons (an acceleration of the crawling-peg, as is the case now). Therefore, the tax objective of the Fund would be achieved.
The current management challenge is enormous because social demands intensify just as inflation becomes more intolerable. In other words, the acceleration of inflation is offset by the portfolio, but this is just what to cut to stop the nominal stroke. The situation is complex, but the last thing to lose is hope.
*Francisco Mattig is an economist and portfolio manager at Consultatio Financial Services
Francesco Mattig
Source: Clarin
