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

Fernando Morra came to the Cabinet of the Ministry of Economy in January 2021, following a series of changes in the organization chart of the Hacienda Palace. For more than a year he served as Minister of Economic Policy, considered the Minister of Economy, and his academic specialty is studying the inflation process because it was officially announced when disembarking from the economic team.

The subject of the inflation process was a postgraduate thesis after receiving him at the University of La Plata, who was also an alma mater for Martín Guzmán. His first job in academia was with Guzmán as a research assistant and professor of currency, credits and banking at UNLP. He has even been working in that chair with the minister for 10 and a half years.

Mora, a fan of San Lorenzo, started public management in 2006 and worked for the Ministry of Economy during the Nestor Kirchner period. Then she moved on to the province of Banco and later passed on to the local government of Buenos Aires during the administration of Daniel Sioli. In the Buenos Aires administration, 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 accumulated 52.3% of inflation between February 2021 and last month.

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

The objective of his research was to study “episodes in which price increases are in the middle range, 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, the last 10 years of inflation in Argentina are not taken into account.

His paper states that “the normal state of inflation is considered to be an increase in price levels between 15% and 30% for more than three years.” He also defined “High inflation refers to a situation in which the economy has 30% inflation for the third consecutive year.” Therefore, according to that definition, Argentina would be recognized as a high-inflationary economy.

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

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

He later analyzes what the inflation process was like in some cases. “Of the 106 countries in total, 57 (54%) appeared orderly with low inflation levels in a medium inflation situation, while a 33 (31%) transition was seen as a short reversal into the medium and high inflation range, and 16 (15%) did so towards high inflation episodes.

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

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

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

Among the important issues of lowering inflation rates considered normal, Guzmán, an inflation expert brought to the Ministry of Economy by Guzmán, said: “It is natural that the correct decision of the nominal anchor is a fundamental point in an economy with medium inflation. Realizing a successful transition to low inflation depends on the ability to coordinate the smooth evolution of a series of relative prices.”

In particular, he said, “The transition from moderate inflation to low inflation represents a challenge to replace this resource with another resource (in the previous mention of inflation tax) or, alternatively, to cause a slowdown in spending growth on resources in the sector,” he said about reducing the deficit.

He also assured in another trench that regulatory prices, such as tariffs that the government should raise this year under a program with the IMF, are also decisive factors. “In this case, the economy can maintain a series of regulated prices, a situation that further complicates the management of the inflation process. When carried out jointly, price deregulation may affect the initial conditions. It was established and led to a higher level of initial inflation.”

Regarding classic options in Alberto Fernández's government menu, such as adjusting expectations, Morra says in this paper, “It does not necessarily mean that the ability to adjust expectations is carried out towards a desirable country. An interesting historical example of Argentina was that of fuel, and price adjustments served as a signal of willingness to adjust, triggering individual inflation expectations.”

Another aspect that Morra's research analyzes is how wages “follow” inflation in the context of falling price rhythms. “With regard to the Chilean and Colombian economies, both economies have a high level of wage index in relation to past price movements.” He said.

“As detailed in the paper, this indexing phenomenon means that real wage increases are directly related to the rate of inflation, which is one of the main reasons why deflation must necessarily slow down in a moderate inflation situation.” He warned. “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 income, which can create an imbalance that will raise questions about the inflation process itself,” he concludes.

Keep reading: