REVISITING THE INFLATION TARGET MEANS ACCEPTING MORE POVERTY

The Government decided to update its inflation target. Originally, inflation for 2018 was set at between 8% and 12% per year, but the revision modified it to 15%. For 2019, the original goal was between 3.5% and 6.5% per year which was increased to 10%. The change means a reduction of inflation at a much slower pace. In this way, Argentina will continue to endure price increases well above those observed in developed and even in neighboring countries.

Controversies arise around this change. In general, the prevailing opinions were that the change is positive because is more realistic and implies a defeat for the Central Bank’s leadership. These conclusions overlook the fact that who sets the goals is not the monetary authority but the government and that allowing for more inflation also implies being less ambitious in reducing poverty.

In order to shed light on the motivation of the change, it is useful to appeal to official data. In this sense, according to the Ministry of Finance, it can be seen that:

• Between 2007 and 2013 the fiscal deficit was 2.2% of GDP on average, and the inflation rate was 23% annually.
• Between 2014 and 2016 the fiscal deficit increased to 5.5% of GDP on average, and the inflation rate increased to 36% annually.
• For the year 2017 it is projected that the fiscal deficit will not be lower than 6% of the GDP, but inflation will be reduced significantly to 24%.

These data show that there is a correlation between fiscal deficit and increases in prices. Although inflation depends on more other factors and 2017 data are provisional, the trend shows that the increase in the fiscal deficit was closely associated with the inflation rate growth and that there were more efforts in lowering inflation than reducing the fiscal deficit. This means that the failure was not of the Central Bank, but of the rest of the public sector that was unable or unwilling to reduce their fiscal spending at a level consistent with the inflation target that the government set for itself.

Experience shows that with inconsistent fiscal policy, there is not much room for the Central Bank to control inflation. Inflationary pressures can be appeased by raising the interest rate. But it is a short-term strategy because it discourages investment, generates exchange rate appreciation and aggravates the fiscal situation by increasing interest expenses. Therefore, the government’s decision to change the target is an act of honesty. Tolerate with higher inflation was preferred to the alternative of continuing to force the monetary authority to apply harmful measures to production. The announcement also recognizes that, at the current pace of gradualism, it is not possible to reduce inflation in the time originally planned.

From the political point of view, it is an acknowledgment of the enormous difficulties to address the social goal of having a more efficient public sector. The tortuous process of changing the pensions adjustment formula demonstrated the incapacity of the political class to deal with strategic issues with seriousness, tolerance and responsibility. Given this structural weakness, it is only possible to go on financing the fiscal deficit with inflationary tax.

Reviewing the inflation target is an act of honesty but also of resignation to keep tolerating the high incidence of inflation and, along with it, poverty. Those that oppose the efficiency of the public sector are the middle and upper income segment of society struggling to pay less taxes and to continue benefiting from the public spending, even when in their speeches they pronounce social compromise. In parallel, the most punished by the inflation tax are the poor. Tolerating more inflation is a pragmatic decision that underlies the hypocrisy of declaring in favor of the poor but acting against them.