Report Nº: 95729/03/2022
The government declared war on inflation with the same instruments it has been using so far. It continues to underestimate the impact of excess money printing on prices. Nevertheless, the most contradictory thing is that the government itself needs higher inflation to reduce public spending in real terms.
The President of the Nation “declared war on inflation”. What motivated the use of such a quixotic metaphor is surely the acceleration of inflation. In the first two months of the year, inflation stood at 4% monthly rate, which means an annual rate of 60%. A sensitive indicator, such as food, has been growing at 6% monthly rate, which implies an annual rate of 100%. The alarm bell that must have caused the greatest concern is that food prices in Gran Buenos Aires are growing above the national average.
The war against inflation will be faced with price controls, an anti-hoarding law, a 2% increase in export duties on soybean products to finance a wheat price stabilization fund, and the summoning of business and labor unions representatives. These are the same measures that have been announced and applied until today. Given that inflation continues to grow, the decision to go to war with the same weapons with which all battles have been lost suggests that the official strategy is to use them more intensely.
The question is whether more of the same applied with more intensity will be able to appease inflation. To answer this question, it is useful to look at the evolution of three basic figures over the last decade. According to the Ministry of Economy, between 2011 and 2021 it is observed that:
These data show that while the amount of goods and services (GDP) is the same as it was a decade ago, the quantity of bills issued by the Central Bank grew 22 times. With 22 times more bills and the same amount of goods and services, it should not be strange that prices have multiplied by 20. In this context, wanting to lower inflation with price controls, anti-hoarding laws, and agreements with business and union representatives is voluntarism.
The statement that inflation is a multi-causal phenomenon is true. But each causal factor has distinct importance depending on the context. Currently, the fiscal deficit obliges the Central Bank to issue more money than people want to accept. The Central Bank recovers part of the excess of money with Leliqs and passes. But as these instruments are saturated, there is an excess of money that puts pressure on prices. A war against inflation with the money printing machine working at full capacity is a lost war.
The most contradictory aspect of the war against inflation is that for the government it is vital that inflation remains high. In the agreement with the IMF it was made clear that the government’s decision is not to reduce public spending. Even economic subsidies will continue to expand as tariffs will be updated below inflation. This is what makes it possible to boast that this is the “first agreement signed by the IMF without fiscal adjustment”. But for this to be possible, it is necessary to continue applying the inflationary adjustment, as it has been done so far. This means, to appeal to tax revenues increases at the same rate as prices, while public expenditure (especially pensions) increases at a lower rate. Thus, inflation is the only instrument that plays in favor of moderating the fiscal deficit. Therefore, fighting against inflation is shooting to its own foot.
The way to avoid adjustment and lower inflation is to order the State. But as long as disorder prevails adjustment is inevitable. The adjustment may be explicit (increasing taxes or cutting expenses) or hidden (appealing to inflation to achieve the same result by reducing expenses in real terms). What is not possible is the government’s approach that pretends not to organize the State, not to apply any explicit fiscal adjustment and to repress inflation preventing it from adjusting the real value of public spending.