Inflation down on its all fours?

The month is July and the number four but that does not make the four percent inflation announced for last month on Wednesday by the INDEC national statistics bureau a Fourth of July for the country of 9 de Julio – no final declaration of independence from the dragon. The lowest level in the last 30 months and a fraction of December’s 25-plus percent, zero inflation (or even the single annual digit promised by Mauricio Macri at the outset of his presidency) nevertheless remains as elusive as ever.

President Javier Milei and Economy Minister Luis Caputo like to trumpet the fiscal surplus sustained throughout this year as the key to the sharp fall in inflation and not without reason but a steep recession has made at least as major a contribution – it might thus be worth asking whether continued progress against inflation is even desirable. The economic team has been playing up some positive recent indicators (or at least a significant deceleration of the deceleration) as hinting at a return to growth but it should be careful for what it wishes – a strong uptick in economic activity could drive up prices, thus reversing a tendency which is the government’s strongest political asset and hence priority.

Relative prices (one of the direst inheritances received from Kirchnerism) remain out of whack, a disarray also including the exchange rate, with plenty pending as far as the updating of public service billing goes – indeed the steady decline of inflation thus far this year would not have been possible without constant postponement on this front. The crawling peg devaluation of a monthly two percent has persisted far beyond its shelf life in line with Caputo’s hope that inflation and other indicators will converge towards that percentage but that will not happen for a long time and the shortfalls only discourage exports, also bad news for the accumulation of Central Bank reserves. This policy further discourages saving by leaving interest rates in an irksome halfway house – superior to the devaluation but below inflation.

These specific factors could be multiplied but the main obstacle to zero inflation is zero certainty as to the future. Uncertainty is the appropriate word here rather than any mistrust – it would be the understatement of the year to say that Milei’s credibility is superior to that of his predecessor Alberto Fernández, especially these days, but the fact remains that all his explosive sincerity does not leave us much clearer as to what he has in mind. Milei rose to power with an uncompromising commitment to dollarisation but eight months later capital controls far more Kirchnerite than Austrian remain in place while the Central Bank he promised to dynamite gives no clear signals as to what monetary policy lies ahead – a floating exchange rate, a bi-monetary regime, riding peso appreciation or what. Both the reduction of inflation and a fiscal surplus are necessary but not sufficient conditions for a normal economy – towards that end the cepo capital and currency controls have to go and that should be the government’s top priority, even ahead of keeping monthly inflation on a downward path, before they can dream of regaining confidence abroad.

Inflation is constantly described with reason as a tax on the poor, in turn boosting that cliché about the rich becoming richer and the poor poorer. The July data serve to qualify that truism somewhat – the poor may be poorer and certainly more numerous but the rich are also hurting, or at least the middle class. The increases in such typical middle-class expenses as school and club fees, prepaid health, petrol, domestic service and repairs, rent and services in general often double such universal basics as food and beverages (up 3.2 percent last month, mostly due to the seasonal factor of fruit and vegetables), not to mention the return of income tax. Some individuals and growth sectors are making fortunes but if the rich are indeed richer, they are also less numerous – City Hall statistics show the top income brackets in this capital down from 16 to nine percent of the population in the past few years.

Bringing inflation down from an annual three digits (still 263.4 percent) to double digits (50-60 percent projected for next year) is no mean feat but paradoxically enough, bringing the monthly index down from four to three percent is harder work than from 25 percent – especially with so little difference with core inflation (3.8 percent when excluding seasonal and regulated prices). Impressive progress but light years away from a normal economy.