Inflation: February Red Alert

La Prensa – In Argentina, inflation remains a problem. Instead of seeing what the countries that succeeded in eliminating it completely do, our politicians continue with the archaic practices of controlling prices. They are stubborn with the idea that inflation is a multicausal phenomenon and not a purely monetary one.

The year 2019 closed with an annual inflation of 53.8%, the highest inflation in our country since 1991 and the third highest inflation in the world after Venezuela (+200.000%) and Zimbabwe (161%), both countries crossed For civil wars. If we contrast it with the countries of the region, we see that the annual inflation of countries such as Chile, Brazil or Peru are similar and even lower than what Argentina has in a month. Thus, inflation in the world ceased to be a problem, except for countries in civil war and Argentina.

However, in recent times many economists pointed out the failure of the Mauricio Macri government to control inflation as a monetarist failure.

They express that since the plan of the former President of the BCRA (Argentina Central Bank), Guido Sandleris, was to freeze the amount of money and that despite this we had the third highest inflation in the world, the premise that “inflation is always and everywhere a monetary phenomenon” is false.

What these economists do not take into account is that the money supply had an increase in the last year, especially in the last part, but what is not even mentioned is that the demand for pesos by the Argentineans collapsed thanks to the strong devaluations we had from April 2018.

Always remember that money is like any other good. Your purchasing power is determined by supply and demand, so if the BCRA decides not to expand the offer, the purchasing power is determined by demand. In this way, if this falls (as happened in 2019) the purchasing power of the peso goes down, is say, inflation goes up.

Now, what happened in December and what is happening in January is that the money supply is expanding at a dangerous pace, but with the fortune that December and January is a period where the demand for money tends to rise by seasonal factors, such as Christmas bonus payed by employers, end of the year parties and holidays. Thus, this expansion of supply was appeased with a rise in demand.

The problem that arises is that February is historically a month of low demand for money, forming an explosive inflationary combo.

The BCRA will issue papers that nobody wants. This causes the pesos to go to the dollar, causing the gap between the official exchange rate and the parallels (either the blue dollar, MEP dollar or the dollar counted on liquidation) to widen, and / or go directly to the purchase of goods, causing a rise in their prices.

People do not want to save on a currency that continuously loses its value and as a result saves on a currency that keeps its buying power stable, such as dollars. The fact that there is a restriction on the purchase of dollars, all it achieves is to generate a parallel market with the price at which the official dollar should be.

As much as Alberto Fernández believes that with taxes and restrictions the Argentine will stop saving in dollars is a lack of understanding and respect for all of us that all we want is to be able to keep the fruit of our work to use it as and when we want.

By Diego Piccardo – Economist of Libertad y Progreso