The Argentine inflation could be reaching single digits in April, and would hover around 150% annually
Inflation is one of the hottest topics in the Argentine economy. A phenomenon that no president in the last 20 years has been able to eradicate. That’s why President Javier Milei set out to combat inflation at all costs. To do so, he embarked on a series of political measures that resulted in the cutting of various political expenses with the aim of achieving a zero deficit. Many economists had anticipated that in the event of a Javier Milei victory, the blue (parallel) dollar would skyrocket to $8,000. Others, more pessimistic, to amounts close to $20,000. Far from this happening, the exchange rate gap has significantly narrowed. Regarding inflation, many economists had positioned an annual figure close to 400%, mainly due to the strong devaluation of the official dollar in December.
However, the measures taken by Milei and Minister Caputo managed to anchor expectations and achieve a gradual decline in the first months of 2024. In this brief forecast, I anticipate that inflation will reach single digits in April, hovering around 9% (8.7% according to the forecast). For July, it will hover around 5%, and the following months will find resistance around this figure, with amounts oscillating at 4.7% and 4.5%.
I anticipate that inflation will reach single digits in April, hovering around 9% (8.7% according to the forecast). For July, it will hover around 5%, and the following months will find resistance around this figure, with amounts oscillating at 4.7% and 4.5%.
If we measure accumulated inflation based on this forecast, the annual accumulated inflation would be around 150% (149.86%), a figure in line with the forecasts made by the IMF, which estimated an annual figure of 149.4% for this 2024.
What lies ahead in the coming months for Argentina
It’s important to note that, although inflation numbers have shown a downward trend until March, it is still early to confirm a definitive decrease in inflation. We would just be returning to the trend prior to Milei’s assumption. Some of the factors that could shake this trend and alter the course of this inflation forecast that I have formulated, similar to those of the IMF, are mainly two: a devaluation or a lifting of currency controls.
A Devaluation?
The cost in dollars of goods and services in Argentina has increased. Nowadays, if we compare various non-durable consumer goods and even several durable goods, they are just as expensive or even more so than in foreign countries. Up to this month, several salaries and other services remain stagnant. Many economists and economic consultants, faced with this situation of low salaries and high prices in dollars, foresee a devaluation in July. A possible devaluation would contribute to inflationary inertia, a key aspect in price volatility. Inflationary inertia is the perception that various economic agents have regarding the trajectory and evolution of prices in the future. In this scenario, the exchange rate would be functioning as an anchor, something that would not be positive for the government (creating an anchor in the exchange rate). If the exchange rate acts as an anchor on agents and devalues in July, the trajectory of prices in the forecast would change. Personally, I find it difficult (if not impossible) for Milei to walk this path. The president does not believe in artificial prices, and furthermore, a devaluation would imply a new inflationary inertia and contradict what was written with one hand by erasing it with the other. The president is very emphatic in expressing that his measures will not change. All of this with the intention of strongly impacting agents’ expectations.
Lifting of currency controls?
An alternative to devaluation would be lifting currency controls, more in line with the president’s ideology. However, Luis Caputo along with Santiago Bausili (President of Argentinas’ central bank) have expressed on several occasions their reluctance to move forward on this path until there is a solid reserve situation at the Central Bank. The aim is to have enough bank reserves to create the expectation that if currency controls are lifted, the dollar will not skyrocket. In this sense, a new loan would be a possibility to speed up the process.
Although I believe that lifting currency controls is more feasible than devaluation (in my opinion, devaluation would be a failure in the current economic scheme), I don’t see the economic team having incentives to deviate from the current system at the moment. This is mainly because reserves are negative and, under the current scheme, macroeconomic variables are progressing. Reserves are accumulating, inflation is decreasing, and other variables, such as country risk, are moving in the right direction. Furthermore, the sustainability of this model and the credibility of the fiscal anchor are being validated by the international financial market.
We will see which path the economic team takes: devaluation, lifting of currency controls, or prolonging this economic transition scenario?
