Let's start at the beginning. President Alberto Fernández does not want to win the battle against inflation. Otherwise, instead of resorting to the enthusiastic young lady of the Ministry of Commerce, he would have summoned the armed drones of the Central Bank.
But not only does he not want to, but also, as I told him several times in these columns , he needs a high inflation tax to “close” the fiscal deficit agreed with the IMF.
And then? So, what the President really wants is to increase the subsidy for consumption of certain goods in the basic basket, but that this subsidy is not financed by general resources, but by a “tax” paid by a particular sector. And it also wants another subset of goods to maintain its “safe prices”, also financed by the suppliers of those goods and not by public expenditure.
That's all, the rest is sarasa. I expand conceptually. Argentine inflation is macroeconomic, derived from large fiscal imbalances financed by issuance from the Central Bank. So much so that, as Carlos Melconian showed in the presentation of the IERAL 2024 program of the Mediterranean Foundation , Argentina's average inflation rate over the last 80 years was 145% per year. There were periods of low inflation only when temporary fiscal surpluses were achieved, or when debt was raised to finance deficits.
Again, inflation is the tax that closes fiscal imbalances, inflating tax revenues (VAT, gross income, unadjusted earnings, etc.) and liquefies current expenses (in particular retirement and public wages).
Inflation, then, is the way in which Argentine politics postpones the real debate about public spending that has become unfinanciable, and a tax system that is unpayable.
But of course, like any excessive tax, society tries to avoid inflation. And the way to avoid it is to get the pesos off your back quickly, either by demanding goods and services, or by buying dollars, replacing, in order to save, the local currency with a currency whose inflation tax is more “tolerable”.
And since these evasion mechanisms reduce the “tax base”, the amount of pesos demanded, the way to maintain the same revenue is by raising the rate, with a higher rate of inflation.
For this reason, in recent years, inflation has been climbing successive steps, until it was parked in the 40-50 and above range, interrupted only by “precautionary” pesification at the peak of the pandemic and lockdowns. In addition, there are “flows”, the issuance of pesos from the Central Bank, and there are “stocks”, the pesos already forcibly accumulated by the stocks.
Therefore, inflation expectations and its relationship with the interest rate in pesos and the expected evolution of the dollar price are key. There may be little issue present, but if inflation is expected to beat the interest rate, the accumulated pesos will flee in search of alternative goods or investments.
To complete the picture, the effects of monetary issuance on inflation are not immediate, they have some “delayed effect” and, as mentioned above, in general, the transmission mechanism is the price of the dollar, the real currency.
The inflation experienced in 2021 was the result of the issuance of the second half of 2020, like the one being experienced in 2022, is the result of last year's “platyte plan”. I now turn to the immediate juncture.
On this scenario, already endemic to Argentina, the agreement was built with the IMF. The basis of this agreement is a slight reduction in the fiscal deficit through the reduction of energy and transport subsidies. A “weak paper” limit on monetary issuance, to facilitate the collection of an inflation tax close to 50% and reserve accumulation targets, which require some updating of the official exchange rate and an interest rate closer to the expected inflation to encourage demand for pesos.
That is, the agreement is, by definition, inflationary. “Realistic and pragmatic” will say my friend Kristalina, it unanchors the exchange rate and tariffs and does not drastically limit the issuance of pesos. Its objective is not to lower the rate of inflation, it only seeks to prevent it from accelerating dangerously.
Within that framework, there were few of us, and Putin decided to invade Ukraine, putting more pressure on the prices of agro-industrial products that Argentina exports and on the energy prices that Argentina imports in net terms. That is, the collection of withholdings improves, but energy subsidies increase, in the pesos table, and about 4 billion dollars are missing in the dollar account. Put another way, the agreement with the Fund was totally outdated in its quantitative targets.
If we are facing a temporary or longer-term problem, I ignore it. But today, to the agreement with the IMF that will be dealt with by its Board next week, all the numbers must be changed. In this context, comes the “war on inflation” declared by the president. Going back to the beginning of this note, the government's intention is to try to increase the subsidy for consumption of food and other goods to the lower-income sector of the population in order to improve its image in the face of the hard core of its voters. But of course, increasing subsidies is more public spending, unless the financing of these larger subsidies is achieved with more input from the private sector. For all other prices in the economy, “governs” the agreement with the IMF, raising tariffs, adjusting the official exchange rate, and the interest rate.
And it also intends to moderate expectations, with some kind of social agreement, so that inflation remains in the current range and that more contractive measures are not necessary, in a context of growing political weakness.
In short, the declaration of war is “testimonial”. Economically, the government needs stable inflation at around 50-60% a year. Politically, it needs to “make it look like an accident”.
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