Argentina: Inflation Uproar
Argentine inflation in April exceeded expectations, with the Consumer Price Index (CPI) rising to 108% and core inflation surging to 105% (y/y). Finance Minister Sergio Massa, held a lengthy meeting to discuss measures to address the inflation problem and we believe the proposed solution will have a limited impact. The poor economic performance of Argentina could damage the presidential ambitions of Sergio Massa.
Figure 1: Argentina Inflation (%)
Source: INDEC
Argentine inflation came as a surprise in April, surpassing expectations. The Bloomberg market survey projected a 7.5% (m/m) increase, but the figures released by the National Statistics Institute (INDEC) revealed a higher growth of 8.5% (m/m). Consequently, the y/y CPI rose to 108%, while core inflation, which captures underlying trends, surged by 105% (y/y), painting a grim picture. Particularly concerning is the 10% (m/m) inflation in food and beverages in April, a category that greatly affects the most vulnerable population. The latest figure put the final nail in the coffin of the “Fair Price Measures” (here), which was one of the biggest bets of Argentine government to control inflation.
These results have caught not only the markets by surprise but also government officials. Finance Minister Sergio Massa reportedly engaged in a seven-hour meeting with other government officials to discuss potential measures to address the inflation problem. The outcome was a set of measures, which, in our view, will have limited impact in remedying the issue:
- The BCAR (Central Bank of Argentina) raised the 7 day LELIQ policy rate to 97% from 91%, equivalent to an annualized rate of 155% for money market rates, thereby creating a strong positive rate;
- Increased foreign exchange interventions;
- Adjustment of the crawling peg of the official exchange rate;
- Decreased interest rates on credit cards for domestic purchases;
- Expedited authorization of certain imports, including food;
- Pursuit of new deals with the IMF and swap lines with China.
However, we believe that these measures will prove insufficient in tackling the inflationary problem, and some may even be contradictory. When the BCAR increases the policy rate, it incentivizes savings over consumption. On the other hand, decreasing interest rates on credit cards encourages consumption rather than saving, which ultimately reduces the effectiveness of monetary policy. Additionally, facilitating imports will further strain foreign reserves, which are already depleted (here).
The root cause of Argentina's inflation lies in macroeconomic imbalances. The government continues to rely on money printing to finance its own spending, while an unsustainable foreign deficit depletes reserves. In 2023, this problem will be compounded by droughts in rural areas, which will decrease grain production capacity, the main source of foreign currency for the BCAR. Resolving Argentina's macroeconomic puzzle is likely to be costly, necessitating a strong fiscal adjustment. However, in an electoral year, such an adjustment is politically unfeasible. Moreover, with the economy expected to continue shrinking in the coming months, Sergio Massa's political aspirations to become the next President are increasingly likely to falter even before they have begun.