The law of supply and demand asserting itself in Argentina

When few trust the future, productive capacity can’t keep up with demand and the result is, well, entirely predictable…
Inflation, an Old Scourge, Plagues Argentina Again

Inflation in Buenos Aires has been causing prices to rise so fast that store owners have grown tired of updating the prices of products.

Published: February 5, 2011

BUENOS AIRES — Damian Vásquez used to regularly update the prices of household cleaning products on the sign outside his store. Today he often does not bother. Inflation has been causing prices to rise so fast that he grew tired of the effort to keep up.

“When prices stabilize a little, I write the new prices,” said Mr. Vásquez, 27. “But lately prices have been changing almost weekly.”

High inflation — a weakness of the Argentine economy for decades — is soaring again. Independent economists say inflation rose by 25 to 30 percent in 2010, the highest level since the calamitous 2002 devaluation that sent the economy into a tailspin.

This time around, the pain is already being felt by the poor. Food-price increases began to outstrip wage increases in 2010, leading Argentines to buy less food, private economists say. And many in the middle and upper classes are leaning more heavily on credit cards, helping push up levels of personal debt.

While a return to the kind of hyperinflation that swept Argentina in the 1970s and 1980s — when retailers sometimes updated prices hourly — seems unrealistic to most, inflation shows no sign of abating and is calling into question the success of efforts for more “social inclusion” by President Cristina Fernández de Kirchner, who is expected to seek re-election in October.

Inflation has reared its head elsewhere in Latin America as well. Brazil, which was ravaged by hyperinflation of more than 2,000 percent as recently as 1994, has become increasingly concerned that inflation will exceed 5.5 percent this year. In Venezuela, inflation is 27.2 percent, according to Venezuela’s Central Bank, the highest in Latin America, and President Hugo Chávez has blamed “speculators” for raising prices there.

In Argentina, it has become a heated political issue. Mrs. Kirchner insists inflation is not a problem, even in the face of substantial evidence presented by private economists and local officials that the government’s national statistics agency has been grossly underreporting inflation and poverty for four years.

The government’s official 10.9 percent inflation rate is less than half the estimate of private economists and firms like Ecolatina, which put inflation at 26.6 percent in a report last month. The official 12 percent number for poverty is also well below independent estimates of about 30 percent.

The economy minister, Amado Boudou, said in November that inflation was a problem of “the middle and upper classes,” and blamed companies for raising prices. Inflation “is not an issue of big proportions that the Argentine population is criticizing,” he said in a radio interview.

But some economists and pollsters say rising prices of food and clothing affect the poor most, especially those in the informal economy, in which 40 percent of Argentines make their living.

“It is clear that inflation weighs heaviest on Argentines on fixed incomes and especially those in the informal economy that don’t have a union to defend their interests,” said Sergio Berensztein, a political analyst with Poliarquía, a consulting firm in Buenos Aires.

Even as the government says Argentina’s economy grew by 9.5 percent in 2010, the nation’s poverty level topped 30 percent of the population, the highest since poverty exceeded 50 percent after the 2001-2 economic crisis, private economists said.

The poverty level is higher now than the worst moments of the 1990s,” said Domingo Cavallo, a former economy minister. “Without a doubt, inflation is increasing poverty.”

In early 2007, the government of President Néstor Kirchner, Mrs. Kirchner’s husband, who died last year, began manipulating data from the statistics agency, said Martín Redrado, who was president of Argentina’s Central Bank at the time.

Mr. Kirchner replaced personnel at the statistics agency in a bid to “improve operations,” he said. Two of the agency’s directors were fired or resigned after refusing to manipulate economic figures, Mr. Redrado said.

In the years since then, the cumulative rate of inflation has been 120 percent, private economists said, though the government has reported it to be 39 percent in the four-year period, according to a comparison in the newspaper La Nación last month.

The manipulation of the statistics has drastically increased Argentina’s risk profile, driven away foreign investors and complicated the country’s efforts to return to the credit markets, even as it moves to settle $100 billion in debt from a 2001 default.

Mr. Redrado said he resigned from the Central Bank in early 2010 after refusing Mrs. Kirchner’s request to tap bank reserves. After his departure, the government started borrowing heavily from the Central Bank.

Critics say the government is also refusing to print bills in denominations larger than 100 pesos because that would be an acknowledgment of soaring prices and could revive memories of hyperinflation, when the Central Bank issued notes of up to 1 million pesos.

To keep up with the demand for more bills, the government has contracted with Brazil to print 16 billion pesos in banknotes, the first time Argentina has turned to Brazil for printing money, said a spokesman at the Central Bank.

The Kirchner government has tried to quell concerns about mounting inflation by continuing to keep the economy growing at China-like rates, largely fueled by high soybean prices. The government also says the country is in the midst of a consumption boom, pointing to domestic car sales that reached record levels in 2010, and it has protected itself by keeping substantial foreign reserves of dollars.

“Argentina is in a formidable moment economically,” Florencio Randazzo, the interior minister, said on the radio last month.

But that may be part of the problem, economists say. Domestic consumption is surpassing the limits of production, causing inflation. The government has not inspired the kind of confidence that would help increase investment and, by extension, the supply of goods. And by tinkering with the economic data, the government has created an environment in which suppliers and producers, operating absent reliable numbers, feel the freedom to raise prices seemingly at will, economists say.

Salary increases have averaged more than 20 percent a year, yet they are still struggling to keep pace with rising food prices. In 2010, Argentines bought fewer units of beverages, fruits and vegetables, a sign that inflation was finally taking a toll, said Mr. Redrado, the former Central Bank president.

“People have lived under a monetary illusion that is fading away, when the salary increases do not allow you to pay for the food products that you need,” he said.

Argentines are certainly spending, but many are doing so on credit, buying cars, appliances and televisions before they become more expensive. Banks are aggressively issuing credit cards, offering discounts and interest-free payment plans stretching up to 50 months.

Credit card debt rose by 45 percent in November from the year before, up from a 20 percent rise from 2008 to 2009, according to Esteban Fernández Medrano, an economist at MacroVision Consulting. But Argentina still has the lowest ratio of private debt to gross domestic product in Latin America, around 10 to 20 percent, compared with about 40 percent in Brazil and 65 to 70 percent in Chile, according to estimates by several different economists.

“People aren’t saving anything anymore,” said Mercedes Fontao, 31, while shopping at the Alto Avellaneda mall last month. “They are spending what they have and living for the moment, and going into heavy debt on cards to keep it going.”

But some are trying to economize. In Pinamar, an Argentine beach town, business has been down this summer for some restaurants as more people eat at home.

Carlos Bermejo, 74, said he was bargain hunting, taking advantage every Wednesday of a 15 percent discount when using a debit card at the supermarket. But he said he still had to go into debt on his credit cards every month to get by.

“I’ve lived through inflation many times,” said Mr. Bermejo, who owns an apartment in Pinamar. “The young people don’t have that experience. They are going into debt thinking they will beat inflation. But you can never beat inflation.”