Tariffs, price adjustments and deficits: What do inflation experts working with Martín Guzmán think?

Fernando Morra came to the Cabinet of Ministers of Economy in January 2021 after a series of changes in the organizational structure of the Hacienda Palace. He held the post of Minister of Economic Policy for more than a year, was considered Minister of Economy, and his academic specialty studies the process of inflation, because this was officially announced at disembarkation from the economic team.

The subject of the inflationary process was a postgraduate dissertation after receiving it from the University of La Plata, which was also an alma mater for Martin Guzmán. His first academic career was with Guzman as a research assistant and professor of currency, credit and banking at UNLP. He has even been working in this chair with the Minister for 10 and a half years.

Mora, a fan of San Lorenzo, began public administration in 2006 and worked at the Ministry of Economy during the Nestor Kirchner period. It then moved to Banco Province and later transferred to the local government of Buenos Aires during the administration of Daniel Cioli. In the administration of Buenos Aires, he held various technical positions.

Guzmán's Second Ministry regularly participates in meetings with the private sector, but has not appeared in public since he came to the economic cabinet. Since Mora became Minister of Economic Policy, the Argentine economy has accumulated 52.3% of inflation between February 2021 and last month.

His most famous academic work is his master's thesis, published in 2014. It is called “moderate easing of inflation”. The head of the thesis was Daniel Heymann, a well-known economist, professor at the current Minister of Economy and honorary adviser to his advertising, already engaged in public services.

The aim of his research was to study “episodes in which price increases are in the middle range, are not high enough to represent a serious disadvantage in economic activity, or low enough to be considered irrelevant.” In this case, it covered a group of 128 countries between 1960 and 2011. For this reason, inflation in Argentina over the past 10 years is not taken into account.

His work states that “the normal state of inflation is considered to be an increase in the price level between 15% and 30% for more than three years.” He also determined: “High inflation refers to a situation in which the economy has 30% inflation for the third consecutive year.” Thus, according to this definition, Argentina will be recognized as a country with high inflation.

Academic studies have identified eight types of inflationary processes, among which Argentina has been for two years in recent decades. First, for national economies in the 1960s and early 1970s, the cessation of prolonged average inflation events among countries with low inflation, where the outflow of average inflation was erratic, including the new peak of medium and high inflation was that low inflation quickly returned to the Morra state determined that high inflation in the country would continue until the early 1990s.

Secondly, in the category of countries that are currently experiencing moderate inflation (see 2011). “In this case, I have found Argentina since 2007 and Venezuela since 1999.”

Later, he analyzes what was the process of inflation in some cases. “Of the 106 countries, a total of 57 (54%) looked orderly with low inflation under conditions of average inflation, while 33 (31%) were seen as a short reversal in the range medium and high inflation, and 16 (15%) did so in the direction of episodes of high inflation.

“The successful inflation process due to average inflation lasted an average of 4 years, with an average inflation rate of about 5.9% per year and a median of 4.7%. In general, this type of deflation is characterized by a rather slow transition, at least compared to the stabilization events caused by high inflation.” Morra.

“There are three cases where a moderate outflow of inflation took more than 10 years, and two of them occurred in Latin America (Colombia and Chile). In this case, we can see that both countries are among the longest-running moderate inflation and one of the slowest transitions between the two countries.” He continued.

In both cases, in Colombia and Chile, Morra highlighted two factors that are key to the independence of the central bank and the setting of inflation targets to return the path of inflation.

Among the important issues of reducing inflation that are considered normal, Guzman, an inflation expert represented by Guzman to the Ministry of Economy, said: “Naturally, the right decision nominal anchor is a fundamental point in an economy with average inflation. A successful transition to low inflation depends on the ability to coordinate the smooth dynamics of a number of relative prices.”

In particular, he said: “The transition from moderate inflation to low inflation is a challenge to replace this resource with another resource (in the previous mention of the inflation tax) or, in Alternatively, cause a slowdown in resource spending in the sector, “he said of reducing the deficit.

He also assured in another trench that regulatory prices, such as the tariffs that the government should raise this year under the program with the IMF, are also decisive factors. “In this case, the economy can maintain a number of regulated prices, which further complicates the management of the inflationary process. Joint deregulation of prices may affect the baseline. It was created and led to a higher rate of initial inflation.”

Regarding the classic options in Alberto Fernández's government menu, such as adjusting expectations, Morra says in this article: “This does not necessarily mean that the ability to adjust expectations is carried out in the direction of the desired country. An interesting historical example of Argentina is fuel, and the price adjustment served as a signal of readiness for adjustment, triggering individual inflation expectations.”

Another aspect that Morra's study analyzes is how wages “monitor” inflation in the context of falling price rhythms. “As for the Chilean and Colombian economies, both economies have a high index of wages compared to past price fluctuations.” He said.

“As detailed in the document, this phenomenon of indexation means that the increase in real wages is directly related to the level of inflation, which is one of the main reasons why deflation must necessarily slow down in conditions of moderate inflation.” He warned me. “A sharp change in the rate of price growth, coupled with the high indexation of wages against inflation in the past, will lead to a significant increase in real incomes, which may create an imbalance that will cause questions about the inflationary process itself,” he concludes.

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