ANALYSIS

Argentina inflation snaps Milei’s five-month slowdown streak

Argentina recorded the first monthly pick-up in inflation of the year, marking a slight reversal of the downward streak President Javier Milei has put in motion.

President Javier Milei, with his sister, presidential chief-of-staff Karina Milei behind, at the G7 Leaders Summit in at the Borgo Egnazia resort in Savelletri near Bari, Italy, on June 14, 2024. Foto: AFP/MANDEL NGAN

Argentina recorded the first monthly pick-up in inflation of the year, marking a slight reversal of the downward streak President Javier Milei put in motion with his aggressive economic shock therapy.

Consumer prices rose 4.6 percent in June from May, below the 5.1 percent median forecast from economists in a Bloomberg survey. Annual inflation slowed a notch to 271.5 percent, according to government data published Friday.

Utilities led all categories in price hikes as Argentines’ electricity and gas bills soared in June while Milei slashed generous subsidies that have allowed most households to pay less than five percent of the real cost of electricity for years. In doing so, the administration more than doubled energy bills for middle-class residences and set limits on how much poor households can consume while benefitting from the government assistance. 

To maintain voters’ support and keep consumer prices in check in July, the libertarian leader postponed further increases to fuel taxes and utility prices that together would have added 1.2 percentage points to monthly inflation, according to JPMorgan Chase & Co.

Monthly inflation eased quickly from a three-decade high of 25.5 percent in December to 4.2 percent in May. A slow two-percent monthly depreciation of the official peso following an initial 54 percent devaluation has helped keep price growth in check. 

The need to keep a lid on inflation going forward is also the main reason the government refuses to budge on the rate of depreciation, despite growing signs the exchange rate is overvalued.

Since taking office in December, Milei has frozen nearly all public works and allowed pensions and public wage growth to trail inflation. The brutal austerity measures have taken a toll on consumption, construction and manufacturing, deepening a recession that is expected to reverse in 2025.

With inflation picking up, greater attention will now turn to the Central Bank’s benchmark rate, which Economy Minister Luis Caputo said last month would no longer lag behind inflation. 

Later in July, the Central Bank will swap out its repo notes for new Treasury debt, which would become the monetary policy instrument. The move would free the institution to move to positive real rates without ballooning its liabilities.

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