Experts predict that inflation in Argentina will exceed 30% per month in December
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Undoubtedly, inflation is the problem that most concerns Argentines today.
One of the main goals of new Argentine President Javier Milei is to reduce the current interest rate, which exceeded 160% per year in November. But the first measures, which were decided just 48 hours after taking office, will lead to an even greater acceleration of price increases in the coming months.
All economists agree on this point. And the Minister of Economy himself, Luis Caputo, recognized the situation when he reported on the first ten “urgent measures” that the government had taken with the intention of repairing the economy.
“We will be worse off than before for a few months, especially when it comes to inflation,” Caputo stressed on Tuesday evening (December 12) in a short recorded announcement that was awaited with great concern by Argentines.
But he added: “It is clear to us that this is the right path.”
Milei himself warned in his inaugural speech on Sunday (December 10) that addressing the serious problems facing Argentina's economy would require “greatest efforts and painful sacrifices” on the part of the population.
“We know that the situation will worsen in the short term. But later we will see the fruits of our efforts when, over time, the foundations for solid and sustainable growth are created,” the President emphasized.
And Argentines did not have to wait long to feel the pain predicted by the new head of the executive branch. Hours after Caputo's announcement (which included a 50 percent devaluation of the Argentine peso against the dollar), oil companies announced fuel price increases of around 40 percent.
Supermarkets and other companies also rushed to raise their prices they and gas stations had already increased them by around 30% in the days before Milei took office.
According to private consulting firms, inflation in December 2023, previously forecast at around 20%, is now expected to be above 30%. And according to estimates by the influential North American investment bank JP Morgan, this index could even double by the beginning of 2024.
But why has the Argentine government accelerated inflation if its goal is to reduce it?
Minister Luis Caputo announced the government's package of measures two days after Javier Milei took office
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“The root of the problem”
Caputo tried to explain this apparent contradiction in his speech before announcing the package of measures.
The minister emphasized that inflation, like Argentina's other chronic problems (e.g. its recurring debt crises), are actually symptoms of an underlying disease, namely the “fiscal deficit.”
“What is the deficit?” Caputo continued. “Quite simply: a deficit occurs when more is spent than is received nationally. What is actually causing problems is the consequences of financing this deficit.”
The minister points to problems such as inflation, debt and the constant appreciation of the dollar, which governments usually face by borrowing money (which triggers the debt crisis) or printing more money (which brings about eternal inflation, since the more money is available). spent, the less it is worth).
The minister explained that Argentina has faced a budget deficit in 113 of the last 123 years of its history. And he has always resorted to debt or issuing money to solve red bills rather than addressing the “root of the problem,” namely excessive spending.
Argentina thus became one of the countries with the highest inflation in the world and one of the countries that most often defaulted on its public debt in economic jargon, “defaulted” .
In recent years, Argentina has also become the main debtor to the International Monetary Fund (IMF) which, by the way, expressed its satisfaction with the plan presented by Caputo.
After explaining the “emergence” of Argentina's economic problems, the minister stressed that in order to eliminate “dependence on the budget deficit” (according to his definition), it is necessary to reduce public spending.
In other words: an adjustment is required. And this adjustment, according to experts, will accelerate inflation.
Milei explained that there is “no possible alternative to adaptation.”
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Shock therapy
The minister stressed that his adjustment plan dubbed “Caputazo” by the Argentine press was “orthodox and in line with the rules.”
One of his strongest measures (at least for Argentines' wallets) was the appreciation of the official dollar, which automatically doubled from 400 to 800 pesos. In addition, the reduction in energy and transport subsidies will lead to an increase in utility tariffs.
“Inflation is accelerated essentially by correcting the lag in relative prices in the economy: the nature of the official exchange rate, the tariffs paid by households for public services (electricity, gas and water), health insurance, fuel and telecommunications” said economist Santiago Manoukian. from consultancy Ecolatina, told BBC News Mund, the BBC's Spanishlanguage service.
According to Manoukian, the Argentine government predicts that prices will begin to fall after the initial increase.
“If the government's stabilization program is successful, if it is possible to maintain fiscal and monetary discipline and then coordinate downward expectations, inflation should decline after this period of correction in relative prices, as is the case with other stabilization plans implemented in Argentina was.”, According to him.
Argentina has run a budget deficit for more than a century
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Hyperinflation on the way?
Caputo and Milei explained that the current corrections are necessary to prevent inflation from rising.
“The previous administration confronted us with the prospect of hyperinflation and our top priority is to combine all possible efforts to prevent this catastrophe, which would lead to more than 90% poverty and more than 50% deprivation.” [da população]”, explained Milei in her inaugural speech.
On the other hand, the Minister of Economic Affairs warned before the announcement of the adjustment measures: “If we continue like this, we are heading straight for hyperinflation.”
But if the predictions of several experts, including JP Morgan, are correct and Argentina soon sees price increases of 60% per month, the country would technically enter hyperinflation. Finally, macroeconomic theory suggests that hyperinflation is characterized by monthly inflation of at least 50%.
But Manoukian explains that “the acceleration of inflation in the coming months does not necessarily indicate that the economy is heading towards hyperinflation.” According to him, the phenomenon occurs when economic actors demonstrate their “total rejection” of the national currency and “the authorities “Losing control over the nature of the exchange rate”.
“An inflation outbreak is not the same as hyperinflation,” explains the economist. “But inflation may remain high for longer than the government expects.”
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