In economics, when the prices of some products rise and others fall, it is called a change in relative prices, whether due to endogenous or exogenous causes in the market.
INFOBAE – Throughout 2020, Kirchnerists boasted by showing how the strong monetary issue that the Government was carrying out to finance public spending, given the fall in tax collection due to the eternal quarantine, did not generate inflation. On the contrary, the monthly inflation rate showed a descending inflation rate, reaching around 1.5% per month while monetary issuing soared.
What they did not understand is that the quarantine prevented people from spending those pesos that were printed because they were locked up in their homes and, at most, they spent in the supermarket and on medicines. But as soon as the quarantine began to relax, the demand for currency fell sharply and inflation began to skyrocket, reaching levels close to 4% by the end of 2020.
After lifting its foot from the accelerator for a few months in 2021, the government once again began its easy money plan to try to win the mid-term elections. In 2021 monetary issuing was once again main income of the treasure. That monetary expansion continued until January of this year and now the torrent of pesos issued is having an impact on the economy. Current inflation is a consequence of the monetary issue of 2020 and 2021.
It should be noted that the inflation rate we are seeing does not exactly reflect reality either. Since Kirchnerism returned to power, more and more controlled prices are included in the CPI.
Indeed, in November 2019 controlled prices represented 0.6% of the total prices surveyed in the Greater Buenos Aires. As of 2020, inflation began to increase steadily, reaching a peak of 13.1% in November of last year and falling to 7.8% in February.
To this higher incidence of controlled prices, we must add that adjustments have not yet been made to the rates of public services or the official exchange rate. We must remember that in the last 12 months it increased only 18% compared to a substantially higher inflation.
Going forward, the picture is bleak because a strong monetary restriction without a downward adjustment in public spending will mean a strong adjustment in the private sector, either through a higher tax burden on the formal sector of the economy, or through more indebtedness of the public sector, displacing the scarce credit that still remains to the private sector. The torrent of monetary issuing left the peso market flooded, with which there will still be inflationary pressures due to the fall in the demand for currency.
Meanwhile, Minister Martín Guzmán is thinking of promoting a new tax to unexpected earnings. When the price of a product increases for any reason, the profitability increases, and this should serve as a signal that the market to allocate productive resources, attracting investments towards the sectors that offer the most profitability. This means the offer of a product increases and the price falls, eliminating extraordinary profitability or, as Guzmán calls it, unexpected profits. In economics, when the prices of some products rise and others fall, it is called a change in relative prices, whether due to endogenous or exogenous causes in the market. What Guzmán intends is to nullify that market signal and add one more ingredient to the anti-investment cocktail that Kirchnerism has been preparing.
In short, nothing new under the sun. Given the worsening of the loss in the peso’s purchasing power, the Government continues to act on the consequences instead of acting on the causes of inflation.