For the Government, there is something worse than the painful 6.6% that the CPI showed in February: the reminders of the entire saga of failures in the policy against inflation, which the opponents and various critics are taking care of bringing out. For example, that just happens one year after the “declaration of war” what had he done Alberto Fernandezafter in February with inflation of 4.7%, a figure that seemed scandalous at the time but was immediately dwarfed by 6.7% the following month.
Going further back in history, the fact that the 102.5% annualized rate shown by the CPI for February is shocking, because it supposes the breaking of another “psychological barrier”: it reaches three digits annual inflation. It is something that has not been seen since 1991, after the crisis of the second hyperinflationary peak, at the beginning of the Menem administration. In other words, a situation of which no one over the age of 40 has any personal recollection.
But the minister Sergio Massa he cares much more about current affairs than historical comparisons. To begin with, because the worst CPI data is that the item that led the price increases was food and non-alcoholic beverages, with an impressive 9.8%.
It is a piece of information that practically ends the credibility of the Fair Prices program, which provided for the nominal freezing of 2,000 basic necessities, while a list of almost 50,000 products would increase at a rate of 3.2% per month.
Contrary to the skeptical forecasts of economists, the Fair Prices program had set itself the express objective of influencing inflation expectations. Reports of product shortages, accusations of “cheating” by manufacturers and fines on supermarkets have only confirmed skeptical presumptions.
At the political level, the greatest risk for the minister is the erosion of their own credibility. Especially since the number that INDEC has just published confirms the mistake made at the end of the year, when the minister got excited about the start of a downward path of inflation. Massa had predicted that every two months it would drop one point, until reaching April with a record of less than 4%.
With the inflationary acceleration in February, doubts about the effectiveness of the Fair Prices program were accentuated
Today, that prognosis is not only the object of cruel jokes but also puts seriously risk maintaining the reference of 60% for salary negotiations that the government asked the unions. And, of course, 6.6% question the chances that Massa will maintain party support for an eventual presidential candidacy.
In order for inflation to end the year in line with what had been foreseen in the budget law, it would be necessary for monthly inflation to be below 4% between now and the end of the year, something that does not seem likely, especially when the Consultants already anticipate that in March, a typical month of seasonal increases, it could be close to 7%.
Prices go back to the dollar
All that political noise generated around the CPI for February has, however, somewhat overshadowed other data, which do not reach the front pages of the debates but are closely followed by city analysts, financial investors, businessmen and… civil servants International Monetary Fund.
The first key piece of information is that it is confirmed that inflation is once again running faster than the devaluation rate. While prices rose 6.6%, the official dollar did so by 5.4%.
In January, the CPI had been 6% while the exchange rate had advanced 5.5%. And everything indicates that the trend will be confirmed in March, given that with half of the month already elapsed, the dollar moved 2.5% and it is projected that for the whole month it will once again have a variation of around 5.5%. In contrast, all private consultancies forecast that the CPI for March will be well above 6%.
This implies that in the first quarter of the year, a return to the “exchange anchor” policy is already beginning to be hinted at, with a dollar advancing around 17% against inflation of 20%. It is true that it is a slight delay if it is compared with other moments of this government. During 2021, the then Minister Martín Guzmán and the president of the Central Bank, Miguel Pescethey had entered a path of strong exchange rate lag, in which for every three points of inflation the dollar barely moved one point.
It was one of the main issues that the Government promised to correct when it signed the “stand by” agreement with the IMF. And, in fact, the change in devaluation policy began to be noticed when Massa took office. From his debut as “super minister”, an acceleration of the “crawling peg” began to be noticed: in August it had stood at 5.7%, it rose to 6.2% in September, to 6.4% in October and reached a peak of 6.6% in November. In December it fell to 6.2% but was still above the CPI again.
At the start of the year there was a break in the trend: once again inflation exceeds the devaluation rate
This policy allowed the “inflation in dollars” will be attenuated, which in 2022 was 12.7%, a relatively low value if one considers that the previous year it had been 25%. And it is a point that Massa’s team repeatedly defended as part of the stabilization and recovery of competitiveness program. For example, Deputy Minister Gabriel Rubinstein confirmed it when answering criticism about the generation of a “financial bomb”.
“As for the crawling peg, the policy of delaying it has been set aside,” Rubinstein explicitly stated, in the part of his column in which he analyzes exchange rate policy and declares that the short-term objective is to reduce the gap between the official and parallel exchange rates.
However, what is being seen since the beginning of the year is a trend break: No one imagines that, faced with inflation of more than 6% per month, the Central Bank speeds up the devaluation rate to move the dollar by 7%.
The fixed-term interest rate, is it also in the crosshairs?
The second data that marks a change in trend, and that despite not being in the focus of political attention is widely followed by investors, is the relationship between inflation and the interest rate. With the CPI for February, it returned to the situation of inflation exceeding the yield of the monthly fixed term, which stands at 6.25%.
This is another of the points that contradicts the requests of the IMF, which stresses the importance of maintaining deposit rates in positive real terms, as a way of encouraging savers to maintain the demand for pesos and not run to take refuge in the dollar.
The succession of increases in interest rates has been one of the points that greater internal debate have generated in the Government, given that there is a sector that complains of its recessive effect, due to the increase in the cost of productive credit.
In recent weeks, the Central Bank had shown signs of being willing to postpone rate hikes for as long as possible, given the signs of cooling in economic activity. However, the fact that once again the CPI has exceeded the monthly performance of the fixed term raises expectations of a possible upward adjustment.
The Central Bank, under pressure to adjust the interest rates of fixed terms upwards
It is true that if the annual projection is made, the effective interest rate -that is, accumulating interest on the capital- reaches 107%, with which it is still debatable whether the time has come to raise the rate or if there is room to wait a moderation of inflation. But, as the macro outlook is today, and with economists forecasting 120% inflation for the year, interest rate pressures are once again making themselves felt.
Kirchnerism presses for an “anchor dollar”
This break in trends coincides with a time when criticism from Kirchnerism intensifies the economic program that Massa negotiated with the IMF.
It was Cristina Kirchner herself who, in her recent speech at the University of Río Negro, stated that the policy of keeping the dollar above inflation, and the interest rate above both, is a scheme that could deepen the crisis .
The argument that Kirchnerism has been putting forward for some time is that a “crawling peg” that accelerates above the CPI may constitute, in itself, an inflationary factor. They allege that many merchants who take the dollar as a reference when setting their prices will tend to accelerate their increases as a hedge, so they can enter an ascending nominal spiral.
That policy, which Massa calls “alignment of variables” and defines as a form of moderate inflationary expectationshas been pointed out by Cristina Kirchner as one of the points to review in the agreement with the IMF.
And the point was deepened in the recent communiqué from La Cámpora titled “The Monetary Fund and the setbacks of its policies.” In that text it is insinuated that, far from seeking a decrease in inflation, the “stand by” agreement encourages it as a way of balancing fiscal accounts.
“Wouldn’t it be that the morphine for the people to initially support the agreement is inflation? It is clear that the agreement is inflationary”is the eloquent statement of the Kirchner group.
this whole situation put a note of doubt on to what extent Minister Massa will continue to have the conviction -and internal political support- to sustain his plan for the devaluation rate to exceed the CPI and for the interest rate remains positive in real terms.
Judging by what is being seen in recent weeks with the relationship between the dollar and prices, everything indicates that Kirchnerism could impose its point of view and that it is entering a new stage of “anchor dollar”.
