Monday, December 4, 2023

OP-ED | 14-10-2022 09:11

The discreet charm of inflation

The vested interests benefitting from inflation in Argentina are extremely powerful and go a long way towards explaining its extraordinary persistence.

While this editorial had to be written before the INDEC national statistics bureau published its official figure for last month’s inflation yesterday, only the most fractional divergence from August’s seven percent is expected with three-digit annual inflation by the end of the year viewed as inevitable.

The reactions to this inflation are generally as predictable as the figure itself (which does not make them any less justifiable). After running through the details – food and beverages, the core inflation, factors influencing the outlook for next month and future momentum, etc. – the blame game as to its causes starts up, also including some back and forth within the ruling coalition as well as unflattering comparisons with Latin American neighbours. Theories range from uniquely greedy businessmen in this country to rigid monetarism (hard to explain because of the time lag following monetary expansion and because the velocity of circulation is often more decisive than the actual volume of money printed) while many take refuge in a comfortable but vague “multi-causal” explanation. Finally, this economic cancer preying on the poorest most of all is cursed with varying degrees of emphasis and panic.

Yet this editorial proposes to approach inflation from the opposite end of its most attractive instead of destructive features as perhaps the only way to understand its extraordinary persistence. To paraphrase Abraham Lincoln, inflation does benefit some of the people all of the time and all of the people some of the time but it cannot benefit all of the people all of the time – indeed quite the opposite.

Firstly, inflation often stimulates growth (as does cancer). This government is often accused of presiding over stagflation but that is not quite true. While pumping money into an economy is undoubtedly inflationary, some of this money at least will serve to boost consumer demand (especially in the period before runaway prices overtake wages) and that is Argentina’s current experience. This year the International Monetary Fund is forecasting that Argentine growth this year will almost double the Latin American average (four percent as against 2.2 percent) and this is not unrelated to our inflation being so much higher than almost everybody else’s – very much more than double.

As things now stand, the government should be going into the 2023 elections laying claim to three consecutive years of growth, infrequent for decades, but inflation also offers a benefit even closer to its self-interest on the fiscal front. Paradoxically enough, while inflation is the product of chronic fiscal deficits, it also offers the simplest solution to those deficits. While the revenues from a system based on indirect taxation are mostly earned in real time, paying state employees at the end of the month with quarterly pension hikes and delaying reimbursements and payments of all kinds via red tape erodes liabilities and the faster the inflation, the more effective this mechanism. This also applies to the budget – the more inflation outstrips its budgetary projection, the more extra revenue there will be for the government to use at its discretion and we are seeing that today with the 60 percent forecast in the 2023 Budget so wildly undershooting all other estimates. But not only the public sector can play these games – businessmen can compensate their lack of credit by riding inflation to wipe out their industrial debts. The vested interests benefitting from inflation are thus extremely powerful and go a long way towards explaining its extraordinary persistence.

Some of the people all of the time and all of the people some of the time but there is no happy ending. Three consecutive years of growth or not, this government is heading for defeat in next year’s elections, as almost all its members privately admit, and it is not difficult to see why – the massive discontent from virtually everybody losing the wage-price race is plain to see. Yet the inflationary dragon is not some evil monster arising out of the ground – it started life with a more attractive face offering a “little inflation” to stimulate growth and fund welfare benefits upholding the social fabric and it is perhaps important to understand its attractions and the web of vested interests around it if we are to trace the line and uproot it.


More in (in spanish)