Thursday, February 17, 2011

It’s not inflation, it’s just a sensation


4% annual inflation in the UK, 4.9% in China; figures like that would be a dream year in Argentina where despite official government statistics suggesting otherwise, inflation both last year and this is widely accepted as between 25% and 30%.

Inflation in Argentina is nothing new; in fact the ‘I’ word pretty much sums up the recent economic history of the country and has played a role in several landmark events here. The country’s return to democracy for example, followed a period of time in which the biggest banknote went from 1000 pesos in 1975 to 1000000 pesos in 1981; the financial crisis at the end of the eighties came after annual inflation had topped 5000%, and the 2001 national meltdown saw inflation run rife both before and after the 300% devaluation of the currency.

And despite a few years of steadiness it’s back with a vengeance now.

Charting official inflation against private sector estimates
In 2009, private economists and financial consultants calculated that prices went up by between 15% and 18%. In 2010 they suggested inflation ran at around 25% and this year’s figure is expected to be pushing 30%.

Of course the government does not accept these estimates, (which come from internationally respected firms like Barclays Capital and Credit Suisse) and prefers to stick with its Statistics office, INDEC, which puts official inflation at around 10%. 

'No es inflación, es una sensación.'

Inflation is not a subject any politician likes to talk about; in fact the present Economy Minister Amado Boudou refers to ‘price dispersal’ rather than even mention the word; and the government here will often try to suggest that the whole thing is really just a figment of the imagination. This month it has even tried to shoot down the messenger by sending out questionnaires to private consultancies threatening them with a fine of up to AR$500,000 (US$125,000) if they don't demonstrate how they calculate their inflation estimates. 

But despite political spin, Argentines all over the country are suffering the consequences of rising daily costs and are well aware that in this country, ‘prices go up by the lift and come down by the stairs’; if of course they ever come down at all.

In the last few weeks the price of a litre of Quilmes beer in some small shops in Gran Buenos Aires for example, has leapt from around $AR5.25 to $6.50 (a rise of 24%); while customers of Cablevision and internet provider Fibertel received letters last month stating that, ‘due to the generalised rise in prices, we inform you that from February 1, 2011, the national basic cable television rate will rise by 15.9%.’

Not to mention ever increasing property rents, school fees, taxi fares and the cost of bread and milk.

Other businesses do their best to hide inflation.

Many cafes for example try not to adjust prices, but instead of serving three croissants with a cup of coffee, they serve only two for the same price. While Personal (a mobile network operator) has replaced its 80SMS top up card, which previously sold for AR$10, with a 100SMS card with a value of $AR15. At first glance it might look a good deal, but that extra AR$5 buys only 20 extra messages while before it bought 40.

But whose fault is inflation?

In an opinion poll published in last Sunday’s edition of La Nacion newspaper, 52% blamed greedy entrepreneurs and business owners while 38% blamed the government.

In a rare discussion about the subject, President Cristina Fernandez de Kirchner defended herself last week.

“We can't continue with the farce of reading the newspaper and seeing shopkeepers and businessmen complaining because prices are going up and then blaming the government,” she said, “I don't sell anything, I don't produce tomatoes, I don't sell cars, I don't produce steel, I don't produce cement.”

Of course it is not the government which ultimately sets private sector prices but when it comes to for example, food inflation (an estimated 40% last year), CFK can surely not deny a certain degree of culpability.

Her government continually fails to address the uncompetitive nature of the food distribution market which is dominated by only two major companies; and it is her policy of heavy export duties on cattle farmers that persuaded many to abandon the beef industry and switch to the more profitable production of soy, leading therefore to the current low supply of beef and the consequent soar in prices. (Argentina’s long and proud history as the world’s biggest consumers of beef is over and the country currently only accounts for 22% of Mercosur beef exports).

And despite asking for help from the IMF to design a new national price index, the president is shying away from tampering with what experts call 'loose fiscal and monetary policies which make rising prices even harder to contain,' while employing the same unorthodox methods to control inflation and stubbornly refusing to face reality. 

She continues to run with the massively underestimated levels of inflation published by INDEC, even though according to last Sunday's poll in La Nacion, the majority of those interviewed have no faith in the organisation, which has lost all credibility since the Kirchners replaced its boss in 2007.

Instead 35% believed inflation last year was more than 30%; a further 26% estimated it to be between 21% and 30%; while 15% of those asked considered inflation at between 11% and 20%.  

As for 2011, 57% expected it to be above 25%.

Argentina it seems is in the midst of a dangerous game. Most salaries are raised annually by around 20% to keep up with the ever increasing prices, which are not only affecting life here, but are making the country increasingly less competitive in international markets.

Sensation or not, inflation is dangerous.

It is something that dominates the thinking of nearly everyone in Argentina, and be it investing in property or buying foreign currency, people will do anything to avoid it; which can often fuel the situation.

One of the contributing factors to the hyperinflation in the 1980s for example, was Argentines’ investments in savings accounts which guaranteed to beat inflation; meaning that when the government printed new banknotes the inflationary consequence was that much greater. 

Presently the Kirchner government has been careful with printing new money and has been reluctant to issue a 200 peso note despite the devaluation of the 100 peso one.

But Argentines know that in the current climate, keeping pesos in the bank is just throwing your money away and they await a real governmental response. With true inflation in the period 2007-2010 totalling 120% according to IPC (el índice de precios al consumidor) drastic measures could be just around the corner.

11 comments:

  1. Yesterday I walked past a secondhand furniture store near my home, where the owner has a bathroom sink for sale. The sink has been on sale for nearly six months; and yet this week, rather than respond to the lack of demand and reduce the price, the owner raised it from AR$250 to AR$280....Inflation mentality.

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  2. Truly insightful article!

    It seems that the Argentine government is in denial of a major problem: however that will not make it fade away.

    Rising food prices on global markets should be good news for Argentina, but obviously the truth is not quite as simple as that.

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  3. Kari you're right, rising international food prices should theoretically be good for Argentine exporters. The only problem is the government. The beef example is a good one. Two years ago when cattle farmers were enjoying high prices on global markets, the government introduced exaggerated levies on beef exports. That persuaded many to convert to soy production, where high international prices and demand (principally from China) provided good profits for Argentine farmers. When the government attempted to raise export taxes on soy too, strikes, protests and blockades caused havoc in cities; in particular the capital.

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  4. Excellent stuff again. One of the reasons that the UK inflation rate is rising is due to last year's Bank of England policy of 'quantitative easing' (i.e. printing money) to try to free up the financial system and try to get the banks lending. Most commentators here don't seem to have made the connection for some reason (most warned about it at the time, but I haven't seen much mention recently) and the government has come out with some nonsense about "cyclical commodity price spikes" or some such f***wittery. Was there any QE in Argentina?

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  5. Hi Terry, good to hear that the British government is also shameless enough to talk such political 'f***wittery', as you so nicely put it.

    QE indeed contributed to the financial crises in 1989 and 2001 in Argentina. And because this country's economy is so US$ orientated, it can also suffer harsh consequences of any US QE.

    Argentina is currently suffering a shortage of banknotes. At the end of January the government said it was awaiting the delivery of 10billion pesos from the mint. It could be a deliberate delay.

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  6. could well be. The other news here is that interest rates are likely to rise by up to 1% by the end of 2011. The theory is that this will help to curb inflation, but the spectre of 1970's style 'stagflation', with a moribund economy and spiralling prices is looming. Something to look forward to eh!

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  7. I was reading a Buenos Aires real estate blog when I came across an article with the real numbers of their inflation acordind to the most reputable Co. Impressive :(

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  8. The article and the comments give a good impression of the situation in Argentina.
    What I am missing however is the position of the syndicates. They are playing a key role in all this, because the government supports the biggest, the CGT and CTA, as much as it can, although their demands are irrational.
    I would appreciate an analysis going a bit deeper into this intriguing game government, syndicates, RC church, farmers and business people play.
    Also one would like to see more about the personal networks which steer the legal and illegal cash flow in the pockets of a small group of influential people, where at the same moment children die from hunger in a country, able to support app. 400 million people.
    Why is there no outcry when G.Moreno fines private organizations, who deliver there information about inflation (evenif thatwould be erratic information). No judge has been engaged by G.Moreno here. He is truly acting above the law, like a mafiosi.
    If he dislikes information or people he'll act on his own behalf, no legal base is needed. His word seems to be an order for all people working in the harbor, syndicates, customs etc. even if his order is quite obvious against the law and or international contracts (e.g. prohibiting importation of 200 goods, like luxury cars).

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  9. You are correct that the unions (like the two big ones you mentioned) and their extremely close relationship with the Kirchner government are another contributing factor to the country’s inflation.
    The illegal cash flow and the deep-seated corruption among many influential figures is an embarrassment for the country, which as you rightly stated is well equipped to support perhaps 10 times its actual population. I think many Argentines can feel frustrated that the economy is not a hell of a lot bigger than it is, given all the natural resources here.
    As for Domestic Trade Secretary Guillermo Moreno; well not only did he play a part in the Kirchners’ replacement of the former head of INDEC, but as you said, he is often accused of extremely authoritarian behaviour and is not a generally well respected politician. (Like too many his idea of politics is not public service, but personal wealth and power). He definitely has too much power already and on top of his threats to fine the private consultancies over their inflation estimates, last month he applied the Supply Law to freeze petrol price increases and this month has sued Cablevision over its decision to raise its prices. A dodgy bloke quite frankly.

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  10. In the papers today, presidential hopeful Elisa Carrió has claimed that inflation is part of the government’s plan. She said that the policy is to “to keep inflation on the rise in order to increase tax revenues and to expand the economy before the October elections.”
    “This irresponsible inflation policy will be a huge problem for everyone,” she concluded, “We’ve already lived this and we shouldn’t let history repeat itself.”

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