Reuters, BUENOS AIRES, March 15 – Argentina’s monthly inflation rate soared to 4.7 percent in February, the highest since March 2021 and considerably higher than projections, according to the national statistics agency, as the South American country’s president declared a “war” against skyrocketing costs.
What will Argentina’s inflation rate be in 2021?
According to the statement, this figure is substantially greater than that of 2020, when Argentina’s inflation was expected to be 36.1 percent, but it is close to that of 2019 (53.8 percent). The most expensive services in December were hotel and restaurant services (5.9%), followed by alcohol and tobacco (5.4%) and transportation services (5.4%). (4.9 per cent).
Argentina’s inflation rate rose sharply in September 2021, reaching 3.5 percent, up from 2.5 percent in August. Argentina imposed a temporary price cap on the sale of 1,432 mass-market goods across the country in October. Argentina’s price freeze was not the first in recent years in the face of rising inflation. Inflation jumped to 52.5 percent in September from 51.4 percent in August, making Argentina, after Venezuela, the Latin American country with the highest inflation rate.
(The Business Standard staff may have modified just the headline and image of this report; the remainder is auto-generated from a syndicated feed.)
Is Argentina’s inflation high?
But it’s been the case in Argentina for decades, where inflation hit 50% last year and is forecast to hit 50% again in 2022. The long, steady rise in prices in this South American country has prompted a variety of efforts to mitigate the effect.
What is Argentina’s current inflation rate?
Argentina’s consumer price index increased by 3.8 percent in December, bringing the country’s 2021 inflation rate to 50.9 percent, one of the highest in the world.
Some history
Argentina competed with other South American countries and a few countries from other areas of the world for the dubious honor of having the world’s highest inflation rate from the end of WWII until the 1990s. The price rise in Argentina was propelled by rapidexpansion of the money supply, as is always the case with rapidinflation. The government needed a system of taxation that was difficult to dodge and politically simple to execute, and seigniorage collected by monetary expansion fit the bill.
Argentina, like many other chronic-inflation economies, had repeated bouts of hyperinflation followed by attempts to stabilize the situation. In such an inflationary economy, a typical cycle begins with an increase in money production to meet the government’s financial needs. As inflation rises, political pressure to lower it grows, eventually leading to “monetary reform.” The introduction of a new currency (which is convenient because inflation has typically moved nominal prices of goods and services into the thousands, millions, billions, or even trillions of units of the old currency) and promises from the government (which is in charge of the budget) and the central bank (which is in charge of issuing money and is often under direct control of the government) to follow rules leading to slower monetisation are common examples of such reforms.
These rules are frequently in the form of monetaryrules, in which the central bank promises to keep the money supply growth rate within set bounds. Alternatively, under a so-called exchange-rate regulation, countries may guarantee to keep the foreign-exchange rate (the amount of domestic currency required to purchase one dollar in the foreign-exchange market) steady.
Credibility is a fundamental issue with anti-inflationary reforms. People become increasingly dubious of government and central-bank promises to keep inflation under control after inflationary expectations have been engrained in a society. They maintain “defense mechanisms” against the consequences of inflation and the inflation tax as a result of their skepticism.
Keeping wealth in non-inflationary forms is one of these defense mechanisms. People in high-inflation countries often protect their money by holding assets denominated in US dollars. Wealthy members of these groups frequently put their money in American banks or own stock in American companies (this is called “capital flight”). Less affluent people frequently carry $100 bills. Another type of “inflation hedge” is real assets that are not directly tied to the financial sector. Many people in high-inflation economies choose to invest in tangible assets like houses, gold, or even rice rather than financial assets like bank deposits.
Contract and payment indexation is another typical defense strategy. This entails incorporating an inflation-based adjustment of all nominal payments within the contract to account for price fluctuations. Although indexation is tremendously beneficial in assisting an economy cope with excessive inflation, it can also add to inertia, making it more difficult for the central bank to control inflation. Wages (or whatever payment is provided for in the contract) may continue to rise after inflation has stopped in some forms of indexed contracts. As a result, wage costs continue to rise, forcing businesses to raise prices even after monetary growth, which was the root cause of inflation, has slowed.
Argentina had gone through nearly a dozen cycles of hyperinflation and reform by 1990. None of the changes managed to keep inflation low for more than a few years before budgetary pressure and a loss of credibility prompted the central bank to abandon monetary restraint and ramp up the printing press once more. The public’s mood was a mix of desperation for inflation to be eradicated and deep cynicism about the likelihood of effective anti-inflationary policies.
In 1990, President Carlos Menem and his economics minister, Domingo Cavallo, embarked on a really extreme anti-inflationary reform: they introduced a currency board, a straitjacket monetary system. Every unit of the domestic currency (the peso in Argentina’s instance) is backed by a corresponding number of units (one in Argentina) of dollars or other foreign currencies in the central bank’s vault under a currency board (which was also routinely used to control the money supply of Hong Kong). The central bank is only allowed to expand the money supply when additional dollars arrive into its coffers (for example, when the country has a trade surplus). This eliminates the prospect of fiscal expansion of the money supply. The Argentine central bank agreed to swap dollars for pesos on a one-for-one basis, meaning that anyone who handed in a peso might get a dollar in return.
A currency board eliminates the central bank’s ability to issue money voluntarily. Its primary flaw is that it makes it impossible for monetary policy to adapt to domestic economic conditions like recession or banking crises. The currency board, on the other hand, makes sustained inflation impossible as long as it is in place.
The following are excerpts from Domingo Cavallo’s article “Lessons from the Stabilization Process in Argentina, 1990-1996,” which was published in the proceedings of the Federal Reserve Bank of Kansas City’s 1996 symposium AchievingPrice Stability.
The stabilization plan
The government began overhauling the organization of the Argentine economy in 1990. It featured (a) total liberalization of foreign commerce and capital movements, (b) privatization of public businesses and economic deregulation, (c) reduction of the public sector’s bureaucratic apparatus and tax system reconstruction, and (d) the development of a new monetary system.
Government spending plummeted from 35.6 percent of GDP in 1989 to 29.8 percent in 1990, and then to 27 percent of GDP in 1995. The budget deficit fell rapidly from 7.6% of GDP in 1989 to 2.3 percent in 1990, and from 1991 onward, it hovered around 0%, following the economic cycle.
In competitive and open markets, prices for products and services began to be established freely. Since April 1991, all financial and commercial transactions have been conducted in the currency of the public’s choice. The convertible peso, which came with the central bank’s metamorphosis into a virtual currency board, was one of the options. The central bank must back each peso in circulation by an equal amount of gold or foreign exchange, allowing peso holders to exchange one peso for one dollar at any time.
Indexation clauses and other monetary changes in contract terms were prohibited by the same law that created this monetary system. Wage agreements reached through collective bargaining had to be accompanied by productivity agreements.
Inflation declined from 1,344 percent in 1990 to 84 percent in 1991, 17.5 percent in 1992, 7.4 percent in 1993, 3.9 percent in 1994, 1.6 percent in 1995, and 0 percent in 1996 during the twelve-month period between June 1995 and June 1996.
The new monetary system encouraged a significant increase in the external reserves that back the central bank’s monetary liabilities. Reserves increased from $3.8 billion at the end of 1989 to $17.9 billion in 1994. This trend was reversed when a drop in confidence following the devaluation of the Mexican peso resulted in capital flight from Argentina, with reserves falling to $12.5 billion by the end of March 1995. However, confidence was restored as a result of the policies implemented in response to the crisis. Reserves have already topped $20 billion by the end of June 1996.
GDP increased at an annual rate of 7.7% on average between 1991 and 1994. However, the economy entered a period of recession after the second quarter of 1995 as a result of capital flight. The recession lasted a year, and the economy was already showing indications of recovery in the second quarter of 1996, with an annual rate of 3%.
Exports, which had been almost static for the preceding decade, rose rapidly during the stabilization period.
With the start of the recession in 1995, imports, which had increased substantially faster than exports until 1994, dropped.
Despite the substantial growth in GDP, employment developed slowly and experienced a decrease during the recession that began in 1995. The significant growth in worker productivity, which by mid-1996 had reached 1980 levels, explains the economy’s poor performance in regard to employment. The tremendous growth of the economy during this time allowed for the conversion of many low-productivity or unproductive activities that had been artificially formed during the 1980s decade into productive endeavors. This, however, was insufficient to engage the whole labor force. As a result, starting in 1992, the unemployment rate rose, reaching a high of 18.4% of the working population in May 1995. There has been a small decline in unemployment since then. In May 1996, a poll revealed a rate of 17%, which was still three times greater than in the 1980s.
The percentage of households living in poverty (an average of 26 percent in the late 1980s, rising to 29 percent during the hyperinflationary period) decreased to 13 percent in 1994, but rose to 17 percent during the 1995 recession.
Lessons of the Argentine disinflation
The fundamental takeaway from Argentina’s stabilization experience is that inflation may be eliminated even when an economy has been plagued by it for decades. Even after many years of looking for stability, it is not necessary to accept yearly inflation rates of around 10% in Latin American economies.
Another key takeaway from the Argentine experience is that fiscal adjustment, defined as a reduction in government spending, as well as the reduction and elimination of budget deficits, are the keys to stabilization after decades of instability, the source of which is primarily monetary financing of persistent fiscal deficits.
The application of basic discipline on both the private and public sectors is of particular relevance in a society in economic instability owing to inflation. External and internal competitionachieved through economic liberalization, deregulation, and the privatization of public companiesis an outstanding private-sector disciplining tool. The budget is the public sector’s disciplinary instrument. The monetary system is critical for achieving the transparency required for markets and the budget to work effectively.
In Argentina, the achievement of stabilization is attributed neither to quantitative control of the national currency nor to setting its value in terms of the dollar, because these two monetary policy norms were not strictly followed. The government gave the people the option of using any currency they wanted in their transactions and savings. In practice, the public was given the option of choosing between the American dollar, which the public had previously converted into its currency during hyperinflation, and the convertible peso, which the central bank began to offer. This currency should be at least as stable as the dollar, according to the Convertibility Law. As a result, its initial production was limited to the amount that could be backed by the central bank’s gold and foreign currency reserves. The prohibition on monetary adjustments or indexation clauses in contracts was maintained due to the freedom to choose the currency to employ, which was not necessarily restricted to the peso and the US dollar. This was crucial in eradicating all traces of inflationary inertia from the system.
The peso’s stability in relation to the dollar was not an impediment to a strong expansion of exports, which was far bigger than in the previous decade, when the Argentine currency was drastically overvalued. It was also unnecessary to depreciate the peso in order to decrease the current account deficit of the balance of payments, which peaked at 3.3 percent of GDP in 1994 before plummeting to just 0.9 percent in 1995.
The peso’s stability was critical in encouraging public officials and private enterprises to focus more on the real determinants of external competitiveness, such as economically distorting laws and taxes, as well as factor productivity.
The significant economic growth during the stabilization period can be explained by an increase in investment and productivity rates. Allowing higher inflation could not have prevented the rise in the jobless rate. With the exception of the year when the economy was in recession, aggregate demand was consistently rising and threatening to overheat the economy. The causes of unemployment can be traced back to labor market institutional rigidities and 1980s low productivity levels. In both cases, the price stability-achieved transparency offers a much more favourable climate for enhancing the quality of the public policy debate and labor talks that are required to overcome them.
Everything didn’t turn out to be rosy
The aforementioned case study was first published in 1998. Argentina’s financial system began to unravel shortly after that. In early 1995, the banking sector had a crisis as a result of unrelated problems in Mexico, which resulted in a loss of confidence in Argentina. Some of Argentina’s most important banks were in crisis, and the currency board structure prevented the central bank from taking any remedial action, such as acting as a lender of last resort or engaging in general monetary expansion.
Then, in early 2002, a combination of bank problems and mounting government debt triggered a national economic crisis comparable to the Great Depression in the United States. While the currency board was not to blame for the crisis (government budgetary recklessness was), it did limit the central bank’s ability to assist alleviate it. We won’t go into detail about the latter crises because the major focus in this case is on defeating inflation; but, if you want more information, you may read this piece from The Economist’s March 2, 2002 issue for a detailed explanation of the downturn.
Argentina has reverted to some of its previous populist measures in the aftermath of the crisis. Although inflation has not skyrocketed, it has been running at much higher rates than it was during the currency board period. A more recent comparison of the economic policies and outcomes of Argentina and Brazil may be found here.
Questions for analysis
1. What were the consequences of Argentina’s high and fluctuating inflation before to 1990 on the “real” side of the economy? What sectors of society suffered the largest losses? Were there any people who benefited?
2. Why does hyperinflation occur if everyone agrees that it is bad? There is some evidence that countries with central banks that are not controlled by the elected government have lower inflation rates. Why is this the case?
3. What is the primary benefit of a currencyboard system in terms of anti-inflation credibility? Why is trustworthiness so important?
4. During the Mexican currency crisis in 1995, some international speculators withdrew funds from Argentine pesos and other South and Central American currencies, fearing that the peso would devalue against the dollar. Explain why a devaluation of the peso could not occur as long as Argentina adhered to its currency board policies.
What is Argentina’s poverty rate?
With his wife’s wages of 14,000 pesos and a state subsidy of 13,000 pesos, the monthly family income is usually around 39,000 pesos ($195), significantly below the 67,000 pesos that a family of four in Argentina is considered poor.
The government announced on Thursday that the poverty rate in the country of 45 million people fell to 40.6 percent in the first half of 2021, down from 42 percent previously, in a country rich in natural resources such as cattle and corn, as well as natural gas, but plagued by inflation, economic mismanagement, and years of cyclical debt crises.
“We can only eat so much at a time. We don’t splurge on frills, but thank God we don’t go hungry “Maria Eugenia Gonzalez de Rodriguez, 39, a municipal cooperative worker who cleans storm drains in the neighborhood, agreed.
Rodriguez spends his free time teaching soccer to children and teenagers from low-income families so that they might aspire to the professional career that he previously wished for as a way out of poverty.
“I enjoy spending time with the lads and come to do it without any obligation or pay. I do it because I’m passionate about it, and it’s what keeps me going every day “he stated
Is Argentina currently affordable?
Argentina is very reasonable for individuals bringing in high-value currencies as of this writing (March 2021), yet it is more expensive than most other South American countries. If you’re on a strict budget, plan to pay as low as US $22-30 per day, which includes hostel lodging, affordable meals, and local public transportation.
Patagonia and certain other popular tourist destinations, such as coastal cities like Mar Del Plata and Pinamar and the famed Iguazu Falls, are more expensive. These destinations are usually popular with both residents and visitors from around the world. Traveling to isolated regions can also be more expensive, as supplies are more difficult to carry.
What is the cost of living in Argentina?
The Argentine economy was hit by a crisis in 2001, causing the peso to lose a lot of value. As a result, Argentina has become an even more cheap retirement option for Americans. Prior to the crisis, the peso was equal in value to the US dollar. A dollar is currently worth around 37 pesos.
Argentina’s housing, in particular, is quite inexpensive by American standards. Even if you wish to live in a huge city like Buenos Aires, you may expect to pay between $500 and $1,000 per month in rent. You should expect to pay substantially less if you reside outside of the city.
If you don’t want to rent and instead want to buy a house, things can get complicated. It is not always possible to transfer money from a US bank account into or out of Argentina. Consider communicating with the Argentinian consulate if you have specific queries about moving money into and out of Argentina.
Is Argentina a wealthy nation?
Argentina is one of Latin America’s largest economies, with a Gross Domestic Product (GDP) of around US$450 billion.
Argentina has abundant energy and agricultural resources. Argentina’s 2.8 million square kilometers of land are blessed with extraordinarily fertile farmland, gas and lithium reserves, and renewable energy possibilities. With large-scale agricultural and cattle businesses, it is a prominent food producer. Argentina also has tremendous prospects in various manufacturing subsectors as well as innovative high-tech services.
However, the country’s development has been hampered by the country’s past economic volatility. In the first semester of 2021, urban poverty in Argentina reached 40.6% of the population, with 10.7% of the population living in extreme poverty. Poverty in infancy affects 54.3% of children under the age of 14.
To address this problem, the country has prioritized social spending through a variety of initiatives, including the Universal Child Allowance, a cash transfer program that serves about 4 million children and adolescents up to the age of 18, accounting for 9.3% of the population.
COVID-19 has had a huge impact in Argentina. The country’s GDP fell 9.9 percentage points in 2020, the worst drop since 2002.
Despite the fact that the economy has begun to recover, it is still 3.3 percent below pre-pandemic levels in mid-2021, owing in part to a fresh wave of COVID in the second quarter of 2021. In 2021, the primary fiscal deficit is expected to decrease due to the end of emergency programs implemented to combat the pandemic’s effects on one hand, and extraordinary resources from an increase in international commodity prices and an exception tax on large fortunes on the other, on the one hand. However, macroeconomic imbalances persist in the domestic economy. In August, annual inflation, which had slowed in the face of a drop in economic activity in 2020, was 51.4 percent.
In terms of its external debt, the government has completed the process of restructuring all of its debt (both domestic and foreign) in foreign currency, greatly improving the maturity profile over the next eight years. In addition, authorities are discussing a new initiative with the International Monetary Fund.
Is Argentina’s economy performing well?
Argentina’s economic freedom score is 50.1, placing it 144th in the 2022 Index of Economic Freedom. Argentina is placed 27th out of 32 countries in the Americas, with a score that is lower than the regional and global averages.