May 27, 2022

Inflation soars in Argentina amid growing social unrest

Inflation soars in Argentina

The consumer price index (CPI) of Argentina registered a year-on-year increase of 55.1% in March, above the variation of February 2022 by 2.8%

Argentina registered inflation of 6.7% in March and consumer prices accumulated an increase of 16.1% in the first quarter of 2022, amid growing social unrest, with demonstrations demanding more government aid.

Annualized inflation reached 55.1% in March, one of the highest in the world, according to the state Statistics Institute on Wednesday.

The food item had an increase of 7.2% in the month of March. There were also strong increases in education (23.6%), clothing and footwear (10.9%) and housing, water, electricity and gas (7.7%).

This same Wednesday, thousands of protesters marched to the government house to demand jobs from President Alberto Fernández and greater assistance from the State.

“I see things very badly, the economy is getting out of hand for this government,” said Mario Almada, a 60-year-old bricklayer whose biggest concern is that “the money is not enough to buy food.”

The disruption of war

The inflationary jump had been anticipated by the Minister of Economy, Martín Guzmán, who this week indicated that the rate would be above 6% per month.

The minister stressed that “the world is experiencing the worst inflationary process in decades. What is happening with the war (in Ukraine) is a very strong disruption in the entire production chain”.

But he at the same time maintained that he needs more political support for his economic plans to take effect, at a time when the ruling coalition is divided by the agreement signed a few weeks ago with the International Monetary Fund.

“Inflation is attacked with macroeconomic policy, and two issues are needed here: one is an economic program. That already exists today. But on the other hand, political support is needed, because the economy does not function in a vacuum. If politics is messy, it’s much more difficult to achieve anything,” Guzmán said in a television interview.

Argentina agreed with the IMF on a credit program of extended facilities for 44,000 million dollars that contemplates a significant reduction in the fiscal deficit, from 3% of GDP in 2021 to 0.9% in 2024, and projected for this year an inflation of between 38 % and 48%.

That agreement was approved by the Argentine parliament, although a sector of the ruling Frente de Todos coalition close to Vice President Cristina Kirchner voted against it.

The economist Víctor Beker, director of the Center for the Study of the New Economy of the private University of Belgrano, attributed the rise in inflation to the impact of the increases that were planned in energy and education, but also to the effect that “the increase in the prices of commodities (raw materials), due to the war in Ukraine”.

“As if this were not enough, the announcement by President Alberto Fernández about a ‘war against inflation’ was added. This generated preventive price markings, for fear of freezing them”, he added.

Interest rate

In this framework, the Central Bank (BCRA) raised this Wednesday the reference interest rate by 250 basis points, going from 44.5% to 47% per year in nominal terms of the Liquidity Letters (Leliq) that thus grant a effective yield of 58.7%, according to a statement from the monetary authority.

“The BCRA, in coordination with the government, will use all its tools to help moderate the effects of the commodity shock on inflation,” the bank said in a statement, according to which “inflation is expected to begin to slow gradually as from April and May.

Seeking to offset the increases, the government this week renewed a price agreement plan for basic products, which has existed since 2013, and created a stabilization fund for the domestic price of wheat flour.

Already in February, the government had increased the aid received by some 2.4 million beneficiaries for the purchase of food by 50%, taking it to about 6,000 pesos (50 dollars) per month per person.

Argentina experiences a reactivation of the economy with 10.3% growth in 2021 after more than two years of recession, but that figure is overshadowed by high inflation that erodes purchasing power, and by poverty that reaches 37 % of the population.