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Argentina’s inflation raises questions, too

Marketplace Staff Oct 3, 2007

Argentina’s inflation raises questions, too

Marketplace Staff Oct 3, 2007


KAI RYSSDAL: As touchy as the U.S. Federal Reserve is about inflation — which is to say, very — rising prices are an even bigger issue in Argentina. The country’s still trying to put its economy back together after a near-complete collapse in 2001.

Tomorrow, the government will release its latest inflation figures. They’re likely to show the annual rate somewhere around a moderate 8 percent. But that’s a number many economists say is literally too good to be true. Rachel Hopkin reports from Buenos Aires.

RACHEL HOPKIN: Mario is a carpenter. He lives in Buenos Aires. Every day he goes to the grocery store and he’s been noticing some steep price rises.

MARIO: I love mozzarella. I can’t buy it. Three months ago yes, but now I can’t buy it.

Like a lot of Argentineans, Mario is getting worried. His country has made international headlines over the past few years, thanks to the impressive recovery of its economy following the meltdown of 2001. But inflation, an old bug-bear here in Argentina, is also back in impressive form. Frederico Thomsen is an economic analyst based in Buenos Aires.

FREDERICO THOMSEN: But in 2003, inflation was around 3 percent, in 2004 around 6 percent, in 2005 around 12… So it seemed to be doubling every year.

That’s not necessarily cause for concern, says Argentine economist Alan Cibils.

ALAN CIBILS: The truth is, any economy that grows at the rate Argentina’s been growing — around 9 percent a year — is bound to experience some level of inflation. It is not something that one should be alarmed about.

But in Argentina, with its history of hyperinflation, inflation can easily cause alarm — not least within the government, which has used a heavy hand to try and control it. Frederico Thomsen explains.

THOMSEN: It started by having price controls — price agreements, we call them in Argentina. Pretty soon, it turned out to be insufficient as always happens. And therefore, they decide to go this extremely crude way of just manipulating the indicator.

That indicator is the official inflation rate for the Buenos Aires area, published each month by INDEC, the national statistics institute.

THOMSEN: If you can’t control the fever, you start to play around with the thermometer.

Alan Cibils explains how the government is doing this:

CIBILS: For example, in January of this year, the government had agreed to an increase in health care costs of no more than 2 percent. Actual increases was 20 percent, so the number they used for the index was the agreed price of 2 percent and not the actual increase.

Since January, several members of INDEC’s staff, unhappy with the deception, have resigned or been very publicly dismissed or demoted. Some rebel INDEC workers recently argued in Congress that the true annual rate of inflation is actually around 18 percent. That’s more than twice the official figure of just over 8 percent.

CIBILS: Nobody actually believes that — on the right, or the left, foreign or domestic — nobody believes what they’re putting out. And every month, they’re the laughing stock of the economics establishment because of it.

This crisis of credibility could be far more damaging for Argentina and its standing internationally than the inflation that triggered it. Frederico Thomsen advises foreign companies with an interest in Argentina.

THOMSEN: Remember that Argentina was a country that defaulted on its public debt, devalued the currency when it had been promising it wouldn’t, and in fact violated many contracts. So Argentina has an urgent need to overcome that by behaving with some credibility going forward.

Argentina will elect a new president on the 28th of October. Cristina Kirchner, wife of current president, Nestor Kirchner, is widely expected to win. Assuming she does, inflation will be one of her first challenges. In the meantime it’s the Argentine middle classes who are feeling the pinch.

In Buenos Aires, this is Rachel Hopkin for Marketplace.

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