Argentina: Inflation Reaching Triple Digits
January Inflation came hot for Argentina with the CPI index rising 6% (m/m), the y/y index reached 98.8% the highest index since Argentina hyperinflation in the beginning of 1990’s. We forecast Argentina inflation to continue to run close of 100% level in 2023, as we see the government with difficulties to put interest rates on real positive terms and as monetary financing of deficit is likely to return in 2023
Figure 1: CPI Inflation (y/y)
Source: Indec
January CPI came hot in Argentina. The index grew 6% despite the government efforts to manage price increases through the Fair Prices Measure (here). The y/y index reached 98%, the biggest since Argentina hyperinflation of the early 1990’s. The inflation increase was widespread among all items of the CPI basket. Food rose 6.7% (m/m), housing and utilities rose 8.0 % and services rose 7.6%.
The outlook is not very bright moving forward. Inflation expectations are not set fall during the next few months and the Central Bank of Argentina (BCAR) are not set to put the interest rates into real positive terrain. Additionally, the global economy is not set to grow to the point of bumping up BCAR foreign reserves. The BCAR will probably need to keep the Pesos devaluating at a lower rate than the blackmarket one, which in turn makes it difficult to undertake fx accumulation and increase the necessity of having multiple fx rates.
The only good news is that the BCAR is cutting the monetary financing of the deficit, but we are sceptical that this will continue. Argentina will need to reduce its deficit from 2.5% of GDP to 1.9% in 2023 due to the IMF deal and from where they will cut it still unclear. As we have an electoral year, implementing a fiscal adjustment of 0.6% might be very unpopular for incumbent President Alberto Fernandes. Additionally, the low demand for Pesos will make debt issuance difficult during this year, which means some part of this deficit might be financed through BCAR money printing which add to inflationary pressures. We forecast Argentina CPI to continue to run close the 100% (y/y) level during this year.
We run a similar exercise proposed by the IMF (here) decomposing Argentina inflation between past inflation, interest rate, inflation expectation and monetary policy. Most of the actual Argentina inflation can be explained by the level of past inflation (persistence) and inflation expectations, which goes in line with a central bank with little credibility and with difficulties to control expectations.
Figure 2: Inflation Decomposition
Source: Continuum Economics
Repeating the Same Mistake
Despite failing to reduce inflation rates, the Ministry of Economy Sergio Massa is renewing the Fair Prices Measure for four months now. But now instead of keeping the price increase limits to 4% per month, they will go for a lower number, 3.5% and they are increasing the number of products signed to the program. We believe the program will have limited impact to reduce inflation and rather postpone any additional readjustment of prices.