Argentina is once again turning to a combination of unconventional policy tools to curb inflation, which is expected to near 40 percent this year.
In just the first two months of 2021, prices have accumulated a rise of 7.8 percent, casting doubt over the government's goal of 29 percent by the end of the year. That target is way off the expectations of economists too, who predict inflation will end the year at 48 percent, according to a recent Central Bank survey of private economists.
While most G20 countries focus on monetary policy to keep inflation within their targets, Argentina's government is choosing to rely on a less typical set of tools. With a series of measures, ranging from a crawling peg to negotiations with businessmen to limit price rises, economists say the plans will not go far enough to meet official targets.
“Argentina's measures are going to have a short-term effect, but they are isolated actions. They are not part of a programme and they do not go to the bottom of the problem," said Miguel Kiguel, the head of the EconViews consultancy firm and a former chief of advisers to the Ministry of Economy in the 1990s. For Kiguel, the government will be satisfied if inflation ends the year below 40 percent, as happened in 2020.
These are the three ways in which the Alberto Fernández administration is seeking to keep inflation under control this year:
1. Decrease the pace of the crawling peg
One of Argentina's main tools to keep inflation under control is to control the depreciation of the peso's official exchange rate through strict capital controls. In 2020, the country allowed the peso to weaken each month by the same magnitude as inflation, preventing the real exchange rate from appreciating.
This year, however, it is allowing the peso's monthly depreciation adjustments to be smaller than inflation. The fall in the official Argentine peso was 3.3 percent in February, lower than the 4.2 percent depreciation registered in January, and it's at its lowest level in the last four months. So far in March, it has been 2.8 percent per month. Economy Minister Martín Guzmán said last week that the pace of the peso's depreciation would continue to slow down in March.
"We decided to concentrate the depreciation rate in the first months of the year," Guzmán said at an event. Avoiding a big jump in the exchange rate prevents the difference from being immediately transferred onto prices.
2. Controlling monetary expansion
After increasing money issuance in 2020 to pay for its pandemic public spending, the Central Bank is putting an end to monetary expansion. Annual growth in the amount of money printed slowed to 39 percent in February from a high of 77 percent in October. The monetary institution absorbed seven percent of the monetary base in February alone through the issuing of Central Bank liquidity notes, known as Leliq.
3. Agreements on prices
The Peronist government believes that a key cause of inflation is price increases introduced by companies. Therefore, the Fernández administration is doubling the number of products included in its 'Precios Ciudadas' scheme, which freezes the prices of items considered to be essential. Policymakers are also limiting increases in the costs of public services, from telecommunications to basic utilities.
Officials hold meetings with employers and unions regularly to align the expectations of salary negotiations. This usually occurs in the first quarter, when workers call on their bosses to grant them large increases on account of the previous year's inflation. Last year, for example, inflation ended the year at 36 percent. So far, salary negotiations for key groups like bankers and teachers have resulted in adjustments of 29 percent and 32 percent, respectively.
"These measures generate imbalances in fiscal terms and in the real exchange rate," said Kiguel.
The government has also decided to allow some increases in controlled prices, such as petrol and electricity, after freezing them at the start of the pandemic.
For example, state oil company YPF SA announced a staggered price rise of 15 percent in fuel over the next three months. These measures are likely to be passed on to customers.
by Ignacio Olivera Doll, Bloomberg