Inflation: the five conditions for the CPI to slow down to 3% in April according to a consultancy that listens to the Government

The CPI accelerated in December and is expected to continue the same trend in January. REUTERS

Argentina has closed 2022 with the highest annual inflation since 1991 (94.8%) and although a slight slowdown trend was observed in October and November, in December the CPI rebounded again to 5.1% per month. In addition, private consultants anticipate that inflation in January will be close to 6%.

Due to the rise in labor, the cost of construction grew above general inflation in 2022

The total increase for the whole year was 97.6%, compared to 94.8% for the CPI. Most of the rise is associated with the salary cost, followed by materials

In this context, the Ministry of Economy, led by Sergio Massa, seeks to promote an economic plan that definitively reverses the trend and leads the CPI to register a monthly variation within the range of between 3% and 3.99 percent. Is this possible? For the consulting firm PxQ, there are possibilities that the Government will fulfill its objective, but for this, a series of very specific conditions must be met.

Before going fully into the analysis of what must happen for inflation to slow down to 3% per month, it is prudent to remember a little about the economic context that the Government is facing.

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In the first place, from the consultant they clarified that “there was no formal announcement” from the Government about its price stabilization plan, but they clarified that there are several basic components that “give away” a stabilization plan.

On the one hand, they pointed out that the macroeconomic policy is based on a reduction of the primary deficit, elimination of monetary financing to the Treasury, an increase in the interest rate, accumulation of international reserves and devaluation and parity alignments (the latter remains to be seen).

Since Massa took office, spending has fallen 6% in real terms. (Gustavo Gavotti)

“The most heterodox part of the plan, with the aim of reducing inertia and coordinating prices, has to do with the agreements that are carried out from the Economy. The most relevant is Fair Prices, through which the values ​​of 1,900 products were frozen and it was determined that the rest of the prices of the products of the companies that participate in the program do not rise more than 4% per month between December 2022 and March 2023 “, they pointed out.

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“With the price of gasoline, a similar agreement was reached, setting a limit of 4% to the monthly increase until March. In addition, the current attempt to coordinate with unions on salary increases is yet another part of the plan to bring nominality to a lower level”, they added.

Analyzing the actions of the State, from PxQ they highlighted that stabilization plans usually have a price correction component relative to the beginning of the program to avoid lags that affect the deceleration of inflation throughout the plan.

“In this case there was no ‘shock’ correction of relative prices, but rather a gradual ordering. In the current scheme, the exchange rate runs above the inflation rate, the interest rate runs above the exchange rate and inflation, and wages beat all these variables. If sustainable, the foregoing would imply an improvement in exchange rate competitiveness and an increase in real wages in the medium term,” they commented.

All this happens simultaneously with the fulfillment of the program with the IMF, which implies a reduction in subsidies and, therefore, an increase in gas, electricity and public transport rates.

“In the best of scenarios, if all these pressure factors are coordinated, it will be possible to lower inflation as relative prices are rearranged. But it does not seem like a simple task”, the specialists opined.

Regarding the international level, from PxQ they warn that there was a “favorable wind” in the second semester, which was partly due to the financial dynamics of the countries of the region. “Since July of last year, currencies have performed well against the US dollar, the main shares have risen in hard currency measures and the country risk has been reduced. A drop in the price of energy and agricultural commodities was also observed, which takes pressure off local prices,” they detailed.

With the scenario clear, it is now possible to analyze the five conditions that, according to the consulting firm PxQ, must be met for inflation to effectively slow down to 3% per month in just 90 days.

In the first place, they ensure that the macroeconomic order outlined by the new management must be maintained. As high points, the fact that fiscal and monetary policy became contractive stands out.

“Spending went from growing 12% between January and June 22 to falling 6% in real terms between July and November (fiscal data for December has not yet been published). Fulfillment of the goal with the IMF for 2022 was announced and the goal set in the agreement for 2023 was maintained, which would imply an important novelty: contractive fiscal policy in an election year,” they said.

The conditions imposed by the IMF force a reduction in spending by cutting subsidies.

Regarding monetary policy, the consultant highlighted that, when Massa took office, he promised not to finance the Treasury via temporary advances from the BCRA throughout 2022. Although the objective was met, the treasury was indirectly financed via the purchase of securities by the BCRA in the secondary market.

The second condition is that price-wage coordination must be consolidated to guarantee a coordinated convergence towards a lower nominal value.

In principle, the Government seems to have begun to have negotiations with unions so that the parities at the beginning of 2023 contemplate the deceleration of inflation, with a guideline of 60% per year that, monthly, would mean having an average salary growing just above 4 %.

The third condition is that the forward disinflation objective has to be modest in order to continue with the gradual correction of relative prices. In other words: the slowdown has to be little by little.

According to the analysis of the experts, the economic team seems to have that clear aspect. However, it runs into the problem that the relative prices are completely distorted, which undoubtedly implies an obstacle when working with the evolution of market values.

The fourth point necessary to meet the deceleration objective is that there must be foreign exchange to supply the demand for imports and that there must not be decoupling between the supply and demand of goods.

Despite the restrictions on imports, the trade surplus fell 53% in 2022. EFE

In this sense, it is clear that the Government is trying in various ways to supply the reserves, but one of the paths chosen consists of restricting imports. The worrying thing is that even with the obstacles and with the implementation of the “soybean dollar” (it encourages the liquidation of foreign currency), the trade surplus decreased 53% in 2022 and the balance in favor was only USD 6,923 million.

Lastly, the fifth and last condition for there to be the possibility of inflation subsiding to the desired point is that the external context must be favourable-neutral so that no pressure is generated on the exchange and financial front.

As mentioned above, there was a tailwind in the second semester. If this context is maintained, the possibilities of price control will increase.

In fact, from PxQ they assure that, if the five conditions are met, the slowdown in inflation could continue in the coming months and the April 2023 target would be feasible. However, they described the plan as “fragile”, given that “a minimal imbalance could lead to a new acceleration of inflation”, just the opposite of what they want to achieve.

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