The peak of the first quarter places a very high floor on inflation for the year and most economists now estimate that it could be close to 60%. It happens that in addition to the high levels that were already expected since the start of 2022, there was a sharp increase in raw materials and their impact on food and also on the inputs used by domestic production.
The discouraging start in inflationary matters also hits the level of activity. For this reason, the stagflation scenario that had been dragging on in the last ten years is clearly consolidated for Argentina.
This period, which begins in Cristina Kirchner's second term, has as its main feature a brake on the economy, together with increasing inflation. In fact, this trend has been a constant over the last twenty years. From 2003 onwards, inflation was raised step by step to current levels.
The record increase in raw materials generated by Russia's invasion of Ukraine explains only part of the leap expected this month and for the whole of 2022. But even before the conflict, a 55% floor was already expected.
February yielded 4.7% according to the Indec measurement and March will be even worse: it will be above 5%, that is, the highest value since Alberto Fernández became president. It mixes seasonal increases due to the start of class and clothing, punctual increases in public services and in regulated ones such as prepaid medicine. But also the already concrete effects of the war: rising prices of fuel, food and inputs for production, from cotton to nickel or copper.
Miguel Kiguel, director of Econviews, warned that annualized inflation for the first two months would be 65% and the trend will get even worse with the data for this month.
As happened to Mauricio Macri in his first year in office, now all that remains for the President is to point to an inflationary slowdown in the second half of the year. And they may again promise that March “is the worst month of the year” in terms of inflation, as Martín Guzmán reiterated in 2021. History repeats itself.
Are there any real chances of a slowdown that would allow the Government to “dream” of a reduction in the second half of the year? Objectively yes, but it is likely that the process will be very slow. The main variables that would allow for tenuous optimism in this regard are the following:
The impact of rising commodity prices from the war is being felt in full force now. But it is not clear whether forward they will remain so high. For example, a barrel of oil went from $130 to $95 in just one week. If this trend also applies to the main agricultural products, then there will be much less pressure from “imported” inflation.
The IMF program has two concrete measures that should help smooth the price hike. The increase in the interest rate to increase demand for pesos and a strong brake on monetary issuance. But two questions arise. One is whether the Government will honour that commitment to the least expansion of money made with the Fund, something that is complex to achieve this year. In the same way, it remains to be seen how far will the rise in the interest rate, which in recent weeks has attracted more pesos to take advantage of the “carry trade”, or the strong gain of investing in pesos with a stabilized dollar.
The increase in the official dollar is somewhat smaller than what was estimated at the beginning of the year. The head of the BCRA, Miguel Pesce, is devaluing at a rate close to 3% per month, that is less than inflation. However, he is greatly helped by the revaluation of the real so as not to have to accelerate the “exchange table” even more. '
The stagnation that consumption will suffer in the coming months as a result of high inflation would also act as a brake on remarkings. This is also an effect that is slow to come but could happen as the second part of the year approaches. Different indicators show that in fact the economy has been losing strength in the first months of the year and strong increases would be largely responsible. With peers closing at 40% a year, wages are running back to inflation.
Even if there is a slowdown in the second part of the year, it would be difficult to drill the 55% floor that most are waiting for this year. In other words, the slowdown in inflation from greater or June should have a very important magnitude to be in the range of 50% to 55% per annum.
There is a relatively close history that could pay for this expectation. Macri's first year was marked by high inflation, particularly in the first months of government, in 2016.
The withdrawal of the exchange rate and the rise in the dollar, plus the increases in tariffs, had a strong impact on the start of management. But already in the second part of the year there were monthly rates of around 1% or 1.5%, which resulted in a sharp slowdown compared to what happened at the start.
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