In quantitative terms, today’s inflation is similar to that of CFK, but qualitatively the thing is very different.
Inflation is a monetary phenomenon. When money is excessively abundant, its value falls, and this is reflected in the increase of all prices in the economy.
In Argentina 10 years ago we have an average inflation of 27%, occupying top positions in the world ranking of poor monetary management.
According to private data, prices rose around 27% in 2015 and in the two administrations of Cristina Fernández de Kirchner had an average increase of 25.2% per year.
According to official data, inflation closed 24.8% last year and during the first quarter of this year, the annualized figure is 29.6%. That is to say that during the administration of Mauricio Macri – for whom inflation was not going to be an issue during his government – the data referring to the rate of increase in prices are not too far from those of the CFK government.
Taking this reality as a reference, many equate both situations and argue that after all the changes introduced, nothing relevant has happened to the crucial issue of inflation.
Quantitative similarity, qualitative difference
Now while looking at the numbers, the situation seems similar, the truth is that in the qualitative aspect, the change is significant.
With CFK prevailed the Chavista model of economic administration. That is, bills were issued to finance the fiscal deficit, and then the consequences were sought to control all prices in the economy.
During the previous administration, the exchange rate, a classic administrative control of the exchange rate, which seeks to regulate the price of all goods and services related to the dollar. In addition, there was an extensive network of “Controlled Prices”, prices of gasoline, and public service rates (water, gas, light, transport), remained practically frozen.
Finally, they charge withholdings on exports, seeking to divorce domestic and international prices.
This system of controls was what the German economist Wilhelm Röpke called “Repressed inflation”. For Röpke, repressed inflation “basically consists of a government promoting inflation, later prohibiting its influence on prices and exchange rates, replacing the ordering and driving functions of prices with the well-known system of inflation. the wartime economy, consisting of rationing at controlled prices”.
According to the German, whom many consider the intellectual author of the monetary reform and the almost total liberation of the prices that took Germany to the “German miracle” of the postwar period, “the repressed inflation is even worse than the open one, since money ends up losing, not only the function of ordering the economic process acting as a medium of exchange and unit of account but also the no less important one of stimulating the optimal production of goods and their distribution to the market”.
In this also coincided two outstanding Nobel Prize in economics. Friedrich A. Hayek considered that “open inflation is bad enough. But the inflation repressed by the controls is even worse: it is the true decline of the market economy”. Milton Friedman, on the other hand, affirmed that “free inflation is pernicious, but suppressed inflation is worse: the suppression attempt prevents the price system from working”.
To sum up, although today there is inflation as high as that prevailing during the Kirchnerism, the price system operates much more freely than before, with the benefits that this implies.
The short term and the future of inflation
Free prices are absolutely indispensable to have a vibrant market economy. However, its short-term release tends to end up impacting the indices with which statisticians measure inflation.
As can be observed in the graph below, when taking the three-month moving average of monthly inflation in the City of Buenos Aires, it is observed that during the first quarters of 2016, 2017 and 2018, regulated prices rise much more than general inflation, boosting it upwards.
(Note the difference in values between the dotted line, whose reference is on the left axis, and the solid black line, whose reference is on the right axis).
Graph 1. CABA inflation, regulated prices and General CPI.
In the long term, the only thing that determines inflation is the excess in the amount of money. However, the adjustments of some specific prices have a short-term effect that should not be ignored.
However, if the transitory rise in inflation that these adjustments generate, is the cost that we have to pay for the system to work better, welcome.
Finally, it is obvious that we need a more aggressive monetary policy because inflationary records are still far from goals. But let’s also recognize that “M inflation” is very different from “K inflation.”
The Kirchner anti-inflation strategy ignored the causes of inflation and only clumsily sought to control its consequences.
The strategy of Cambiemos seeks – although imperfectly so far – to correct the causes of inflation, but to free up prices, something that any defender of a healthy economy should applaud.
Written by: Iván Carrino,
Economic analyst in Global Investor, contributor to Libertad y Progreso.