Milei keeps the peso from driving huge price hikes

Romina Jara has navigated five runs on the peso in recent years. This year brought the sixth. But unlike in the past, Jara – a manager in a wholesale supermarket – and other shopkeepers don’t plan on passing on the cost increase to customers, at least not immediately. “This time, we’re not going crazy and rushing to raise prices,” the 46-year-old said.

Among the reasons for this: weak consumer spending in Argentina and President Javier Milei’s crusade against inflation, which includes deep budget cuts, a tight grip on the currency and a move by the Central Bank to stop printing money to finance public spending. But, despite lower inflation overall, many consumers are feeling the squeeze from rising bills for school tuition, private health-insurance and other expenses. Shoppers increasingly stick to essentials and foot traffic is thinning, limiting the ability of businesses to raise prices.

As a result, declines in the peso are fuelling smaller increases in consumer prices than in the past. One618, a local brokerage, estimates that each one percent drop in the peso today pushes the national inflation index up 0.17 percent, far below the long-term average of 0.5 percent in Argentina.

Analysts point out three factors that might limit the impact of the recent peso devaluation, which has declined more than 20 percent against the dollar since June, on inflation: the slowing economy that’s restraining demand; Milei’s tighter fiscal and monetary stance; and the government’s determination to defend the peso’s trading band, come what may. Should the effects last, the economy could regain some of the competitiveness it lost in recent years due to inflation.

Still for Jara the steadiness in prices isn’t a good sign. Sales in her supermarket are down 30 percent to 40 percent this year compared to the prior-year period, making her hesitant to raise prices. Jara held off on repricing for two months and now portions cheese to keep shoppers’ bills low.

“Sales are really weak and we can’t afford to raise prices,” she said. “If you raise prices, you don’t sell.” Jara now organises raffles and tastings to attract more people to her shop.

Other businesses are under similar strain. Retail sales have declined eight out of 10 months so far this year, according to CAME, an organisation that represents 400,000 mid-size companies. Confidence among supermarket executives in August fell to the lowest level in more than a year, according to a recent survey by the INDEC national statistics bureau. More than a third of respondents rated their companies’ situation as poor, with only 12.5 percent describing it as good. The next edition of the survey is due Wednesday, as is consumer price data for October.

“The pass-through should be lower than in previous episodes because activity is weak and the fiscal stance is in order,” said Iván Stambulsky, an economist at Barclays. “This depreciation isn’t being aggravated by expectations that it will recur. The starting point for inflation is low, the fiscal situation is in order, and economic activity is weak,” he said.

The bond market in turn is pricing in a decline in implied inflation over the coming months, from current levels near 30 percent to about 19 percent in 2026, according to local brokerage Max Capital.

That would mark a big change for entrepreneurs like Ana Paz, who runs a supermarket chain north of Buenos Aires. Paz still recalls the jitters from sudden peso devaluations in the past, for example in August 2023, when annual inflation shot up to 124 percent. Suppliers, Paz said, at the time preferred to sit on their goods rather than sell. “I preferred to buy everything before everything went to hell,” she said. “Retailers would even raise prices more than necessary – preemptively, so they wouldn’t be left behind.”

After Milei’s party suffered a landslide defeat in regional elections in Buenos Aires Province in September, some boutique wineries raised prices by 2.5 percent to five percent almost immediately. “But most of the market, including big brands like Arcor and Coca-Cola, didn’t move,” Paz said. “The adjustment is much slower now.”

The peso came under heavy pressure in the months before October’s midterm elections, with Argentine officials and even the US Treasury selling dollars to defend it. The tension rattled markets and put Milei on the back foot ahead of the vote. The currency settled after the president’s surprisingly strong showing in the vote, but remains weaker compared to the highs hit earlier this year.

Argentina recorded a US$8.7-billion current account deficit in the first half of the year, according to official data, which many analysts see as a problem. But, the real exchange rate versus a basket of other currencies has depreciated 35 percent since April, according to One618.

Improved investor confidence after the elections sparked a wave of private debt sales that could boost dollar inflows into the local foreign exchange market. Those inflows – together with dollars from energy exports – could support the peso.

“Pass-through is contained” because investors view the present exchange rate as sufficient to keep the current account stable, “so it doesn’t need to move,” according to Juan Manuel Pazos, chief economist at One618. “In previous devaluations, retailers overshot price increases to get ahead of future moves and not be left behind,” he said.

Milei, who built his campaign around the promise to defeat inflation, now faces the consequences of the currency’s depreciation, which caused markets to gyrate and put his performance in the midterm elections at risk. So far, the data suggests the blow will be softer than in past decades, buying him valuable time. But if the peso comes under renewed attack, the fragile equilibrium could unravel quickly and lead entrepreneurs like Jara and Paz to hike prices again.