Argentina reaches 71% annual inflation, record in the last 30 years

With 7.4% inflation in July alone, Argentina had the highest monthly inflation in the last 20 years and the highest annual inflation in the last 30 years. The country faces an increase in public service tariffs and a probable currency devaluation that could raise prices to a level above 100%. The current rate of inflation in Argentina is already the highest in the entire American continent, surpassing, in July, even Venezuela.

You have to go back more than 20 years to find a number higher than the 7.4% in July. It was in April 2002, three months after the country abandoned the so-called convertibility, the 1 to 1 peso-dollar parity system, in force for almost 11 years.

In the last 12 months, the price increase was, on average, 71%. In this case, it is necessary to go back more than 30 years, to January 1992, when the country had already adopted the fixed exchange rate regime that ended inflation after a traumatizing hyperinflation.

According to the National Institute of Statistics and Census (INDEC), in the first seven months of 2022, the price increase reached 46.2%, with July being the highest month, surpassing the 6.7% in March, the 6% in April. , 5.1% in May and 5.3% in June.

While inflation rose by 7.4%, wages rose by only half: 3.5%, indicating a trend towards a lethal formula that combines high inflation with recession.

tendency to get worse

Last week, the Central Bank of Argentina released market expectations for 2022. The country’s 30 main analysts predict annual inflation of 90.2%, 14.2 points above the forecast a month ago. And the ten analysts who got the most right, the so-called TOP-10 in the country, predict 94.7%, 15.4 points more than they evaluated in June.

These numbers, however, may be conservative because, as of September, increases in electricity, gas and water tariffs are expected. It is estimated that the increase could reach 300%. Another element that should fuel inflation is an expected devaluation of the Argentine peso.

“If we project the current rate of inflation for the next few months, we will end 2022 with 92% annually. But this number is without readjusting public service tariffs and without adjusting the exchange rate. Therefore, it is very likely that we will reach 100% of inflation”, tells RFI the economist Roberto Cachanosky, a reference in the country.

The first consultant to project this figure is one of the most recognized, the Latin American Economic Research Foundation (FIEL), which forecasts 112.4% inflation this year.

New dynamics of the crisis

In July, inflation climbed two notches above the already high five. From 5.3% to 7.4%, as a result of an economy suffocated by fiscal, monetary and exchange inconsistencies, and in the face of a government that refuses to adjust the fiscal year.

This resistance made the country, in just one month, have three ministers of the economy, after the resignation of Martín Guzmán on July 2 and the resignation of Silvina Batakis, 24 days later. The current minister Sergio Massa, who has been in office for nine days, has not yet announced a stabilization plan, only stating objectives without explaining the strategies to achieve the goals.

The new minister, for example, guarantees that he will reduce the current 4% of the primary fiscal deficit to 2.5% of GDP, foreseen in the agreement with the IMF. However, he did not reveal how he would achieve this feat with just five months to go in the year.

Sergio Massa, a politician with a degree in law, needs the support of an economist recognized by the market, but so far, none has accepted the post of deputy minister.

Political uncertainties were the trigger for the Argentine peso to devalue against the parallel dollar, the only market to which Argentines have access. And the dollar in Argentina is a benchmark for prices.

“In Argentina, a good part of governance is managing the peso-dollar relationship. Those who cannot manage this point, have difficulties to govern. Therefore, the dollar in Argentina is an economic issue, but also a political one”, explains the analyst to RFI Gustavo Marangoni, former president of the country’s second largest bank, Banco Provincia.

“The Argentine has the dollar as a reference. He thinks in dollars. Those who have the capacity to save, save in dollars.”, he adds.

At the same time, due to the scarcity of Central Bank reserves, the government made it difficult for importers to access dollars, complicating local production and strengthening the parallel market.

As a consequence of the expansive wave of July, the current month of August is already starting from a minimum of 6% of inflation.

lack of reaction

The core of the problem in Argentina is a gigantic fiscal deficit, financed with unbacked currency issuance. The mountain of money that the Central Bank prints turns into inflation and exchange rate pressure.

Reserves available at the Central Bank are only around US$ 1 billion, enough for just the next two weeks of imports.

“Without devaluation, reserves run out. With this level of reserves, if there is no devaluation, there will be a lack of dollars for importing inputs and, without being able to import components for local production, the economy is paralyzed”, warns Cachanosky.

Despite the emergency situation, the government seems to bet on an old recipe: a new price freeze.

President Alberto Fernández has announced that he will convene businessmen and unionists for a new price and salary agreement, the third time he has tried the same recipe in his current term started in December 2019, during which accumulated inflation reaches 201.6% .

“It’s the same failed recipe as always. The Argentine economy needs a drastic shock of fiscal adjustment, but the government prefers to stretch the situation as much as possible until the October 2023 elections. It seems very difficult that they can stretch that much”, notes Cachanosky

According to political analysts, Massa wants to hold out until the elections in October next year and leave the political cost of an adjustment to the next government.

“Sergio Massa wants to control the match, but not change the game. We are losing the game by 4 to 0. Massa enters the field to guarantee this score, to avoid a bigger rout. It’s not to win. The plan is to lose the elections of the next year with 35% of the votes and leave the chaos for the next president. With 35% of the votes, they get enough presence in Congress to block the next government”, explains political analyst Jorge Giacobbe to RFI.

“But the abyss can appear earlier. Perhaps this proximity to the abyss is what leads them to take measures that they would not take otherwise. Perhaps it is the gravity of the situation that motivates more assertive measures”, ponders Gustavo Marangoni.

Leader in the inflationary ranking

Meanwhile, monthly inflation in Argentina is the highest on the American continent. July’s 7.4% surpassed even Venezuela’s 5.3%.

Chile (1.4%) and Peru (1%) reach the point of inflation while Colombia (0.81%), Uruguay (0.77%), Mexico (0.74%), Paraguay (0.7%) , Bolivia (0.39%) and Ecuador (0.16%) come low. Brazil was the only country to experience unprecedented deflation (-0.68%).

If we exclude Venezuela (139% in 12 months), Argentine inflation is seven times higher than that of the other countries that have accumulated more inflation in the last year.

While Argentina accounts for 71%, the countries in the region have 13.1% (Chile), 11.1% (Paraguay), 10.21% (Colombia), 10.07% (Brazil), 9.56% (Uruguay) ), 8.74% (Peru), 8.15% (Mexico), 3.86% (Ecuador) and 2.04% (Bolivia).

Just one month in Argentina is equivalent to, or even exceeds, a year of inflation in neighboring countries.