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Is Argentina Lying About Inflation Again?

By | [email protected] | April 27, 2016 3:24pm

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What is this, 2013?

The headlines surrounding Argentina’s economy read like a veritable tale of two countries. If you read the international press or run in diplomatic circles, sheer euphoria. Argentina has quickly righted the economic boat by settling with the holdout “vulture” funds, removing currency controls and export restrictions and restored a level of respectability and professionalism to governance.

Inside Argentina, headlines are telling a story we’ve all heard before, starring inflation. Persistently high and rising inflation is troubling, but more troubling is the government’s flippant and dismissive treatment of how difficult it will be to quash inflation and just how much it is affecting the lives of Argentina’s people.

In early January, Finance Minister Alfonso Prat-Gay stated that the monthly inflation increases of 5 percent in December were a “sensation” and that, “we are coming down in the first 15 days of January to inflation levels more or less similar to what we experienced in October [1.5 percent] and September [1.7 percent].”

Prat-Gay went on to chalk up December’s runaway inflation to a result of lifting the currency controls known as the cepo and predicted that inflation would be well below 1 percent per month by February. Spoiler alert: that didn’t happen.

How High Is Inflation?

Inflation is high enough that everyone is squabbling over how to measure it again.

In the City of Buenos Aires during the first trimester of 2016, the price of the basic basket of foods increased 14.5 percent, only slightly higher than the total basket including other goods and services that rose 11.3 percent over the same period. It’s staying up there too — from December to January, the basket of consumer goods rose 5 percent, whereas from February to March it rose 4.4 percent.

Private entities consulted by La Nación estimate that March saw a monthly inflation of 3.7 percent, which translates into inflation between 32 and 35 percent per year — at or above the 30 percent inflation presided over by former President Cristina Fernández de Kirchner. In April, estimates predict inflation will exceed 6 percent, or 40 percent year on year. You would have to be actually dead to not notice how hard 6 percent monthly inflation bites at your lifestyle.

To be fair, and contrary to the belief of many porteñosArgentina does not end when you cross General Paz Highway at the capital city’s limit. But the national statistics agency INDEC is still not publishing inflation estimates and according to Prat-Gay, it will not be in condition to publish official inflation numbers until 2017. And since Buenos Aires Province is home to over half of Argentina’s population, you would think Buenos Aires would be a fair proxy for statistics for the country as a whole. But you’d be wrong.

In the beginning of April, the government decided to change the way it measures economic growth, which determines payments on warrants tied to growth, and to use a consumer price index showing less inflation to determine payments on inflation-linked bonds. Regarding growth, the government is revising growth data from 2004 and 2015 and using a different base year for calculations. This change will affect whether or not GDP warrants that are paid when growth exceeds 3 percent will trigger a payoff this year. A bit non-transparent and disappointing for sure, but it is likely that the methodology for calculating economic growth warrants an overhaul. An exercise for another day.

Let’s focus on inflation again — and specifically on the decision to use an alternative consumer price index to Buenos Aires to calculate Argentina’s inflation. Rather than the capital, Argentina’s inflation will be measured by the consumer price index in San Luis Province. You may now commence scratching your head.

San Luis Province

It

It’s here!

If you aren’t familiar with the province of San Luis, you are not alone. San Luis City, the capital of San Luis Province, is not even within the largest 20 cities or towns in Argentina. With a 2010 population of 431,588 people, the province contains only about 1 percent of the population of Argentina and isn’t what you’d consider a thriving business hub that weighs heavily on the economic importance scale. San Luis is east of Mendoza Province (where the wine is) and south of the provinces of San Juan (where mining is), La Rioja (where Menem is), and Córdoba (where the industry is).

At Bloomberg’s Argentina Summit, Central Bank (BCRA) President Federico Sturzenegger defended the use of San Luis’s inflation index by stating that “the cost of living in San Luis is more in line with the rest of Argentina.” Conveniently, prices in San Luis have risen much less than in Buenos Aires. In February they rose only 2.7 percent, compared to the 4.4 percent increase experienced in the capital and 3.07 percent in Córdoba, the country’s second-most populous province.

San Luis’s inflation numbers were used as an alternative to the unreliable data published under Cristina due to the transparent methodology used to calculate it, but that argument really no longer holds and provides outside observers with an unrealistic picture of what inflation in Argentina is today. Furthermore, at the beginning of the year, when San Luis posted inflation numbers double those of Buenos Aires, the government stated that it would use consumer price data from both regions because they use “similar and reliable methodology.”

What Is Causing Inflation?

So why did the government suddenly decide that San Luis alone should serve as the benchmark for Argentina’s inflation? While the initial inflationary effects of Macri’s economic policy changes from removal of currency controls and export barriers may have run their course, a new set of inflationary measures resulting from the removal of utility subsidies are just coming to the fore.

Argentina’s economy is facing inflationary pressure from multiple fronts, but the removal of utility subsidies is currently the most pertinent and it affects the City of Buenos Aires and its surrounding suburbs more than the rest of the country. In Buenos Aires, higher electricity prices resulting from the partial removal of energy subsidies was the most pronounced source of inflation for the first three months of 2016. While the Buenos Aires statistics agency sees food prices stabilizing in April, this month increases in the price of gas (100 percent), water (300 percent) and transportation (300 percent) kick in, which are likely to hike Buenos Aires inflation even more.

There is certainly an argument that Buenos Aires inflation numbers overstate the problem to some extent, but not to an extent great enough to use San Luis as a proxy for the country.

What Happens Now?

It’s time for Argentina’s government led by President Mauricio Macri to stop collectively patting themselves on the back  for not being kleptocratic maniacal populists and to realize that Argentina’s economy begins and ends with Argentines rather than endless rounds of courting ambiguous international investment.

In a blatant reversal of his January promises of 1 percent monthly inflation by February, Prat-Gay has now promised that the first half of the year was spent “ordering things” and that “in the second half [of the year] growth will reappear, inflation will slow and we’ll have  a more orderly situation with confidence and the ability to incorporate large investment projects while looking at the long term.”

That’s very nice, except that the short-term tools a country has at its disposal to push inflation down are anti-growth in nature. On the monetary policy side, Argentina’s Central Bank has to maintain tight monetary policy by keeping interest rates high — currently at 38 percent. On the fiscal side, the government has been reducing public expenditure where it can, primarily in the form of layoffs.

The government’s economic team is congratulating itself on settling with the holdouts and returning Argentina to international capital markets, following the swift removal of currency controls that caused parallel currency markets and the removal of export barriers. These politically difficult policy shifts had relatively straightforward economic consequences, one of which is inflationary pressure that the government is hoping to offset by growth led by foreign direct and indirect investment.

Foreign investment is critical to Argentina’s emergence from a decade of economic mismanagement veiled in populist diatribes and blatant lies about statistical figures. The need for dollars from abroad is exacerbated by the economic nightmare going on in Brazil, a major destination for Argentine exports, as well as the worldwide trend away from emerging market investment. Yet from here on the ground, it seems the government’s economic team should take a break from the “Argentina Is Great” dog and pony global roadshow to come to terms with the economic havoc that inflation is wreaking at home.

President Macri took an important step by stating in a public interview that inflation is the responsibility of the government. He has also introduced socially popular measures to offset inflation’s impact on the nation’s poor, including transportation subsidies in the interior and a promise to put off further subsidy cuts and price increases on utilities until 2017.

In the same interview, Macri expressed confidence that inflation would go down during the second half of 2016. But if controlling inflation rests almost solely on attracting foreign investment, that is troubling. Promises of investment, especially from the United States, may take a while to come to fruition because that is the nature of foreign direct investment. The dust has barely settled on the first bond issuance, and the majority of this investment’s economic effects on inflation will likely lag behind by at least a few months.

Promising an end to inflation and return to growth in the second half of 2016 is premature, and Minister Prat-Gay should reconsider his outward posturing. His relationship with the financial markets was described as “helpful” by investors in the recent bond issuance, but back at home his dismissive attitude to the suffering of a majority of the population is downright hurtful.