One month after the launch of the second phase of the stabilization program (“zero emission”) by Minister of Economy Luis Caputo, there is partial compliance as there is still some issuance. Nevertheless, the Central Bank (BCRA) continues to aim to close the main emission channels from recent years. This is highlighted in a report from Lambda Consultants, which predicts that there will be additional pressure on alternative dollars moving forward.
The work from the consulting firm, led by Maximiliano Ramírez, who is also the chief economist of Indalo Group, states that although July’s inflation was the lowest of the year, it exceeded government projections, particularly in the core category. The report explains, “this high baseline is linked to services and represents the downside of recovery.” They indicate that the elevated baseline raises questions about the exchange rate scheme and that wholesale inflation maintains a heavy baseline for August.
Wholesale inflation in July accelerated compared to the previous month. The most significant price increases resulted from rising national product prices, while imported products have shown alternating increases and decreases over the previous months, indicating that, on average, they have been moving at a pace similar to the crawling approach of the BCRA,” according to the report by Ramírez and Fernando Morra, managing partners of the consultancy.
Wholesale inflation creates a heavy baseline for August
The report notes that the Consumer Price Index (CPI) registered a 4% rise in June, a slowdown of 0.6 percentage points compared to the previous month. While the data confirms what the Minister of Economy anticipated (the lowest monthly inflation of the year), it is above the estimates shared by officials from the Central Bank (BCRA). The figure that concerns the Government most is core inflation, where 3.2% was projected instead of the 3.8% that ultimately occurred.
Consequently, the consultancy claims that “Inflation does not appear to be declining as rapidly as the authors of the document projected” and they emphasize that the high baseline in core inflation primarily stems from services. They also diagnose that “non-tradable” inflation in the country is increasing at a rate significantly above the general rate and is more reflective of the growth in formal wages.
“This type of ‘inertia’ presents a complex dilemma for the Government: without an instrument to change it, inflation is advancing at a higher rate than the government desires, which contradicts income recovery. Lacking tools for pricing and wages, cutting this inertia stifles the recovery,” state Lambda Consultores.
They identify the main issue with the high inflation rate as being the exchange rate, warning that “the government is still trying to align it with the rate of the dollar’s devaluation.” They caution that if the baseline remains at July levels for December, almost all the real depreciation experienced in December will have vanished.
Salaries, public spending, and economic activity
On a different note, they mention that formal income is being restored; however, the significant issue is that jobs are being lost. They add that “formal remuneration increased more than inflation in June“. They detail that the labor market is being reconfigured at the margins, while the base activity is helping to mitigate job losses, but far from achieving full recovery.
Another section of the report indicates that the Government is expected to present fiscal figures for July this week. “Given the increase in floating debt last month and the limited room for creative accounting, the fiscal result is unlikely to bring good news for the Government,” they warn.
They also mention that June’s activity data will reflect a decline in the industrial sector, which could potentially be mitigated by the reversal of drought conditions and recovery in construction, although an improvement in the trade balance is anticipated due to increased export settlements in July.
A particular concern moving forward is international reserves and the exchange rate. Following the USDA’s announcement of a record soybean harvest in the US, the international price of the oilseed has fallen to US$350 per ton, representing a 24% decline so far in 2024.
“This impact compounds the challenge of accumulating net international reserves, which currently stand at -US$4.8 billion. In a context of a 2% crawl, this would exert additional pressure on alternative dollars, which continue to stabilize their prices around $1,300 per dollar, potentially leading to an increased exchange rate gap, currently at 40%,” they forecast.
Dollar: risks and benefits of a currency correction
They caution that if the necessity for an exchange rate correction is internalized, an increase in prices is also expected, which is beginning to be reflected today. “Changing the exchange rate scheme carries the risk of validating inflation that remains exceedingly high, although the Government could undertake this if it alters its narrative,” they highlight.
They report that year-on-year inflation has reached 263.4% and has decreased for the third consecutive month, yet they anticipate that, since this annualized figure is moving at a rate of 60%, the slowdown in the year-on-year indicator will become much more noticeable in the coming months, even if the “floor” remains constant in price developments this month.
Consequently, the government currently seems reluctant to capitalize on this potential “success”, although an acceleration of the devaluation may prove beneficial as the midterm elections approach, presenting a substantial advantage in terms of inflation.
Economic Outlook Post-Caputo’s Second Phase of Stabilization Program
A one month after the launch of the second phase of the stabilization program
(“zero emission”) by Minister of Economy, Luis Caputo, there are signs of partial compliance. Despite ongoing emissions, the Central Bank (BCRA) is striving to cap the primary emission routes of recent years. This is underscored by a Lambda Consultants report, which anticipates emerging pressures concerning alternative dollars.
Current Inflation Trends and Forecasts
The consulting firm, led by Maximiliano Ramírez, chief economist of the Indalo Group, notes that while July inflation was the lowest month of the year, it still exceeded government expectations, particularly regarding core inflation. They observe that “this high floor is associated with services and is the flip side of recovery,” suggesting that persistent inflation may lead to skepticism regarding the exchange rate scheme.
Moreover, the report underscores that wholesale inflation accelerated in July, with national product prices rising aggressively while imported product prices fluctuated. This trend signifies an average price growth similar to the controlled crawl managed by the BCRA.
Inflation Data Highlights
| Measurement | June Rate (%) | July Rate (%) | Core Inflation Estimate (%) |
|---|---|---|---|
| Consumer Price Index (CPI) | 4.0% | Exceeded Estimates | 3.2% (actual: 3.8%) |
The slow decline in inflation is partly attributed to services, which signal a level of “inertia” in inflation rates. According to Lambda Consultores, “non-tradable” inflation within Argentina is growing faster than the general rate, posing a challenge for economic recovery efforts.
Key Challenges Ahead for the Government
The report assesses that the high inflation rate is closely tied to exchange rate fluctuations, warning that the government’s aim to align local currency value with the U.S. dollar’s depreciation remains a challenge.
Impact on Salaries, Public Spending, and Economic Activity
The consultancy reveals that while formal incomes appear to have stepped up, the stark reality remains that job losses are occurring concurrently. They report formal remuneration increasing above the inflation rate in June, indicating a complex dynamic in the job market.
This week, the government is expected to release fiscal results for July, with predictions suggesting no positive news due to increased floating debt and diminished opportunities for creative fiscal management. Furthermore, June’s performance data will indicate challenges in the industrial sector, although recovery in construction from drought effects might provide some offsets.
International Reserves and Exchange Rate Pressures
A critical aspect influencing the economic landscape is the situation of international reserves. After the USDA reported a record soybean harvest in the U.S., soybean prices plunged to $350 per ton, marking a significant 24% decline since the start of 2024.
The Risk of Currency Correction
The anticipated necessity for an exchange rate correction raises concerns, as a price hike is expected and may validate persistent high inflation rates. However, if the government alters its narrative, it could align strategies to accommodate this shift. Year-on-year inflation currently runs at 263.4%, gradually decreasing over the past three months.
While a notable slowdown is expected, resource constraints and persistently high inflation thresholds could hinder recovery initiatives. Notably, the government appears hesitant about leveraging potential improvements leading toward the midterm elections, despite potential benefits from accelerating currency adjustments.
Conclusion: The Path Forward
In light of the ongoing developments and pressure surrounding the economy, it is evident that managing inflation, employment, and public expenditure will require strategic interventions and perhaps a re-evaluation of current policies. Economists are watching closely as the situation unfolds, and further decisive actions may be essential to mitigate the growing financial pressures faced by the Argentine government.
