Why inflation is not going down and Guzmán has no choice but to step on the dollar

A work carried out a few years ago by economists Roberto Frenkel and Lorenzo Sigaut Graviña revealed that the rise in prices in Argentina is explained about 60% by price increases. wages and 40% for the dollar. It is not about negotiating increases in tariffs or public services. And keep the broadcast constant.

In other words, Martín Guzmán’s strategy to contain inflation in the face of the elections seems clear: to control both variables.

Something like this started to happen. First, the parities communicated by the government were closed on the basis of the inflationary pattern that Guzmán boasts of being able to achieve this year (around 30%). And the price of the dollar, says Guzmán, will increase by 25%.

However, why is inflation still high? Why are there no results? In February, prices rose 3.6% after two consecutive months of monthly increases of 4% (December-January).

In economics, there is something called delay, that is, present behaviors that reflect past events. And one of them was the rise in the dollar after the bond agreement last September.

From there, the government’s main economic achievement, the exchange rate began to “copy” the change in the CPI from the previous month. Guzmán and Miguel Pesce envisioned a roadmap to financial normalization and an agreement with the IMF by the end of 2020.

But after a few weeks, the blue rose to $ 195 and the spread to 130%. Inflation woke up and as the official dollar was “tied” to the prices of the economy, the exchange rate continued to rise by a barrel. In words that resonate with difficulty as economists speak, Emmanuel Alvarez Agis puts it this way: “The nominality started to be passed on and the variation in the exchange rate became a factor of more pressure on the prices”.

Guido Lorenzo, director of the consultancy firm LCG, explains this phenomenon: the public anticipates and increases prices. “Inflation is high for a main reason: the lack of coordination of the Economic Cabinet with the rest of society. They announce an unfulfilled goal (29%) and the situation becomes difficult to control. The public adopts as a mechanism of increase in coverage in case “.

LCG estimates 50% inflation for this year. There are firms like Estudio Broda or Eco Go which are closer to 40% over the year. But all above what the government supports.

And now?

Former Economy Minister Domingo Cavallo said Guzmán was running low on tools and had resorted to a classic from the Argentinian repertoire: the dollar peg. In short, if the prices in Argentina are explained by wages and the exchange rate, walking on the Guzmán dollar will have one less headache.

Of course for a little while. Falling behind the dollar it is known to accumulate a mountain of problems for when it is necessary to update it. Ideally, and without any negative events occurring in between. “If the inflation rate does not decelerate and the delay is seen as something constant, the pressure against the peso will materialize in the gap between the official exchange rate and the parallels.”, Tell Agis.