Inflation targeting: the chronicle of a death foretold


AMBITO FINANCIERO – After the “recalibration” of the inflation goals, going from a ceiling of 12% for 2018 to a target of 15% that approached the consensus projected by the analysts, they automatically raised their estimates by a couple of percentage points, understanding that it meant a sign of greater monetary easing. In the second half of last year, the Central Bank had slowed the pace of issuance to 27%, compared to the same period in 2016, against an excessive 37% in the first half of 2017, given the reality of higher inflation than expected.

In January, the BCRA (Argentina’s Central Bank) gave the reason to market expectations and increased the rate of issuance to lower the interest rate. This decision coincided with a decline in the real demand for pesos, which started in mid-December with the acts of violence and difficulties faced by the sanction of the official reform projects, and the distrust that awaited the recalibration of the inflation targets. If the preference for having national currency falls, so does its value and, if the BCRA increases its “production”, the decline is enhanced. So there was a 20% drop until the end of January, burying the recalibrated goals.


The increase in the February exchange rate was of another nature. The international turbulence motivated a positioning in dollars and an increase in its value worldwide. Of course, this had an impact on the local market; but it did not have the seriousness of generating inflation since the peso was not losing value. It only implied that goods, whose value depends on the exchange rate, will increase faster and private services, due to the lower demand that will imply having to spend more on the former, more slowly. Anyway, since February 8 the story changed and both the dollar and our currency began to fall and march in search of previous lows. Therefore, as things go, in the first quarter the rise in domestic prices will have exceeded half of the “recalibrated” increase for the whole year, and the annualized of this first semester would have a floor of around 24%. The BCRA could argue that the depreciation of the December-January peso will not impact inflation. This argument was the same one that was used to diminish the relevance of the mini-bull of May-August 2017. The result was an accumulated inflation in the second half of 2017 of more than 24%, against an 18.5% inflation in the same period of 2016. That is, the price increase did not decrease, but it grew last year. We anticipated this when we required the BCRA to go out and defend the value of the peso that was falling, generating more fear among its holders and further reducing its demand and price. The reality showed that the shrinking of the unit of measurement that we use to value everything in our economy is quickly reflected in the exchange market, due to its liquidity, but shortly after that same smaller meter is used to value the goods on supermarket shelves and, with a little more patience, the services, so they will increase. Given the obvious, the officials hide in Core inflation, which is not very good, but it is better than the total. It is to which the prices regulated by the State are removed. However, it should not be surprising that it is lower. The income of the people is finite. That is, when utility rates increase, we spend more on them and therefore we can spend less on everything else. As the price of goods depends on the value of the dollar and its price abroad (because they can be imported or exported), the adjustment is made in private services, which can increase their prices much less than inflation; so that your demand does not fall further. This same explanation serves to demonstrate that the increase in the variation of the CPI due to the increase in public service tariffs only impacts the indicator of the month in which it occurs. Then, people have to reduce other expenses and the smaller increase of the latter will determine that in a few months they tend to the inflation that the BCRA determines with its issuance or allowing a fall in the demand for pesos to depreciate it.

In short, if we start from the 18.5% annualized inflation of the second half of 2016, it was not impossible to meet the goal of 17% or less in 2017. If it was not done, it was because the BCRA gave priority to pesos issuance for the financing of the government, lower the interest rate and increase domestic credit that sucks almost the entire state, sustain the exchange rate that goes down due to the high indebtedness of the public sector abroad and accumulate reserves, which it does not use to defend the value of your own currency. Therefore, inflation goals do not exist or will not be met. It is only to be expected that, given its other priorities, the BCRA will try to reduce inflation as much as possible, at the cost of continuing to lose credibility, which is the main capital of a central bank and which already has little left.

Written by Aldo Abram
Ejecutive director, Libertad y Progreso
Published by Ambito Financiero