08 February 2007

Inflation inflated

Inflation, sir? No, thanks. The media are gloating over the scandal caused by the government's alleged interference in the measurement of January's inflation rate by INDEC (the National Institute of Statistics and Censuses). But first, some history.

Inflation is the historical archenemy of the Argentine economy. Back in 1989, president Raúl Alfonsín was forced to resign after food riots caused by hyperinflation. In 1991, Carlos Menem brought Domingo Cavallo to the Economy Ministry to fight inflation; Cavallo froze all bank accounts for 180 days, and thus halted the multiplication of money in circulation and stopped financial speculation and inflation, causing some prices to drop by 50% overnight. Then Cavallo came up with Convertibility, which effectively turned over the control of monetary policy to the U.S. Federal Reserve... and brought 12 years of almost zero inflation, and a few instances of deflation. Inflation exploded again when Convertibility was abolished in 2002, but it was just that — not a hyperinflationary catastrophe.

From 2003 on, the government decided that it wouldn't "cool off" the economy, which was expanding at an accelerated rate, so Argentina's inflation rate has been greater than that of most other Latin American countries and "normal" stable economies, around an annual 10–12%. Workers' salaries and companies' profits have recovered; the downside is that there's so much money flowing in the system and so little incentive to save (interest rates are ridiculously low) that everybody except the poorest of the poor is spending like crazy: cell phones, air conditioners, cars, clothing, plasma TVs, tennis shoes, home theaters, MP3 players, tourism packages...

So what's the problem now? Ten-percent inflation is rather high in international terms, but it's not that much when GDP is growing at an annual 9%. The labour unions are strong and the government is prodigal, so private and public sector wages are keeping up, more or less (in fact they recovered 8% over inflation last year). Price controls leave holes everywhere but they're effective overall.

The problem is, Doña Rosa feels that the inflation rate as measured by INDEC is not real. INDEC goes around each month, looking at the prices of a basket of 8,000 products that (ideally) make up a representative sample of citizens' consumption patterns. If a product's price doesn't increase during a given month, it'll bring down the rate in proportion to its statistical weight — and the basket includes items like tourism and canine grooming, which are not exclusive of the filthy rich but are certainly not within reach of many lower-middle class families. Naturally, the weight of such items is very small, but the media and the opposition made so much out of it that Doña Rosa is now convinced that the IPC (Price Consumer Index) is fabricated. Luxuries like canine grooming and imported LCD screens are expensive, but they've been expensive for a while, so their prices won't move, while basic needs like tomatoes, jam, chicken and T-shirts go up and down all the time (always more up than down) following seasonal effects, unjustified maneuvers of the producers, and a myriad other causes.

The last stroke was the sudden replacement of the head of INDEC by another person, just before the announcement of the January inflation index. The opposition, the media (even abroad), and the consumer organizations pounced on that — why was a long-time, respected official of one of the few government organizations with a reputation of flawless political independence replaced overnight without a clear cause by someone chosen by the national government? Could it be because private analysts were foretelling that the January rate would be over 1.5%? In 2006 it was 9.8% — was that because the government pressured INDEC to produce a number below the (psychologically important) 10% that the Economy Ministry had publicly set as a target? For how long exactly had the government tried to fool the public? And so on.

INDEC has, as I said, a reputation of independence and of methodological quality that has been acknowledged here and by international organizations. That reputation has been now tainted. After the dismissal of its top official, a number of employees denounced the government's interference and announced they'd monitor the figures closely, warning that they wouldn't let them be tampered with. The vociferous de facto speaker for the president, Minister Aníbal Fernández, spoke of "mafias" and accused the employees of having an agenda. Security personnel surrounded the seat of INDEC and the figures of inflation (the PCI and the inflation on a basket of basic products) were released later than usual.

The Kirchner administration reacts to accusations with paranoia and verbal excess; the inarticulate and generally sleazy opposition, and our lowest-common-denominator mass media, arguably deserve such a treatment... but I believe that someone should strive to stay in the high moral ground, so I can't justify that, no matter how much in agreement I may be with K in other issues. If you're right, you don't need to scream about it — reality will prove you right in the end.

The net result of this is that now nobody believes INDEC's inflation rate. This is serious not only in itself. We've emitted inflation-indexed debt bonds; those bonds fell abruptly after the scandal, as consultants recommended holders to sell. The country risk index assigned to Argentina by JP Morgan jumped more than 6% — that means Argentina will pay more interest for loans, as it's a riskier investment to lend to us.

Prices will continue to rise, as ever, independently from the fate of INDEC and the meddling of the national government. The possibility of runaway inflation seems remote now. Ultimately it's us consumers who can exercise control, by not buying obviously overpriced goods. Why don't we see that is a mystery.

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