Forbes – This week, Argentina released its February inflation statistics. Inflation spiked, again. Indeed, the official annual inflation rate jumped to 51.3%/yr.
While this spike caught most observers off balance, it didn’t surprise me. Each day, I accurately measure Argentina’s inflation using high-frequency data and Purchasing Power Parity theory. By my measure, Argentina’s annual inflation rate is 100%/yr (see the accompanying chart). That’s nearly double the official rate reported for the end of February.
In response to Argentina’s inflation surge, the Banco Central de la República Argentina (BCRA) did what all central banks with no credibility and junk currencies do. It jacked up interest rates in an attempt to keep the peso from plunging and generating more inflation.
The lesson from this is clear: Argentina’s 22nd program with the International Monetary Fund (IMF) is not working. As they often do, the IMF Doctors have prescribed the wrong medicine. To hold the managed pegged peso exchange rate, which is a fatally flawed exchange rate regime with no credibility, the BCRA has to impose sky-high interest rates. With these rates, the economy will collapse, and the peso will eventually follow.
When I reflect on the peso, there are plenty of additional lessons. Let’s turn back the clock. Argentina’s monetary system from April 1, 1991 to January 6, 2002 was known locally as Convertibility. It was an unusual name for an unusual system. The Convertibility System was not a currency board. Rather, it was a currency-board-like system: a mixture of currency board and central banking features.