President Fernandez tries to slay Argentina’s inflation dragon

Buenos Aires, Argentina- Tired of living in a one-bedroom apartment with their young daughter in Buenos Aires, Nerina Torre and Fernando Vargas thought a bigger home was within their reach.

It was March 2018 and a new government mortgage product had lowered the income threshold for borrowing.  So the couple sold their apartment, used the proceeds as a down payment on a larger unit, and took out a 1.4-million peso mortgage (about $70,000 US at the time) with a monthly repayment that was within their budget.

Until blistering inflation struck, doubling what they owed.

The mortgage Torre and Vargas took out is indexed to inflation, meaning the amount they have to repay on that loan rises or falls with a basket of prices.

And in Argentina, all bets are off when it comes to chronic price increases.

“We thought that inflation could end up hurting us,” Torre, a government worker, told Al Jazeera. “But no one thought it was going to be the highest we’ve seen in 28 years.”

Inflation hit nearly 54 percent in 2019 – the most since 1991 – in a year that saw the recession deepen with sharp devaluations of the Argentine peso, high unemployment, growing poverty and increasing desperation.

Official figures for January show the pace is slowing. But the dizzying ascent of prices has made it difficult to know what consumer goods are supposed to be worth in South America’s second-largest economy.

Salaries are rising, but not far or fast enough to keep pace with inflation. With incomes squeezed, sales are down and inventory is stacking up in warehouses and store shelves. Retailers are offering discounts and deferred payment schemes, but their efforts have largely been in vain.

“We used to use our credit card to buy something that was important,” said Torre, whose family joined others in a protest in January outside the Central Bank in Buenos Aires, demanding help.

The government has stepped in with some relief, but not enough to help Torre and Vargas.

“Now we use [our credit card] to pay for food, and services,” Torre told Al Jazeera. “When we just can’t make it, our family lends us money.”

‘Three-headed snake‘

In this latest downturn, things began to fall apart in 2018, about halfway through the term of former President Mauricio Macri, a disciple of neoliberal, market-friendly economics who had made slashing inflation a cornerstone of his administration. He had promised to bring it down to single digits.

But instead of dropping, inflation soared. Other indicators are equally grim – thousands of small businesses have shuttered, and poverty according to the official statistics, affects at least one-third of the population.

The official exchange rate has risen from 12 pesos to 1 US dollar at the end of 2015, to 61 now. On the black market, it currently takes 78 pesos to buy $1.

Adding to that fiscal pain – the country is teetering on the edge of another default with creditors as it tries to restructure its debt.

Fed up, Argentines booted Macri from office in October’s presidential elections and installed the left-of-centre Alberto Fernandez who won by uniting the powerful Peronismo movement.

“Argentina is a country in intensive care,” President Fernandez told a group of German business leaders in February, during a visit to Berlin to boost economic ties.

During his address to open the ordinary session of Congress, Fernandez promised to “use all the legal tools” at his disposal to dampen inflation and protect consumers from abuse. “It’s not possible that prices continue to grow, when the currency is stable and tariffs and gas prices are frozen,” he said.

However, officials have steered clear of stating targets. Market analysts surveyed by the Central Bank of Argentina predict it will hit 41.7 percent this year.

“The government is fighting against a three-headed snake: debt, inflation and recession,” Leandro Santoro, a legislator allied with Fernandez wrote recently on Twitter. “What is useful to confront one issue, aggravates the others. If you don’t understand that, you don’t understand anything.”

Shortly after taking office, Fernandez implemented measures to bring some relief to struggling Argentines.  Utility and gas prices were frozen. Limits imposed by the previous administration on the purchase and withdrawal of US dollars were extended. And a 30 percent surcharge was added on those transactions and travel abroad as part of a “solidarity” plan to address poverty, that also included bonuses to low earning pensioners. 

The government has also enacted a programme that creates “prices of reference” for food and other basic staples. President Fernandez has urged citizens to report stores running afoul of price controls through an app.

But success is mixed. While the most recent numbers show that inflation overall is slowing – 2.3 percent in January, down from 3.7 percent the previous month – the price of food climbed by double that amount.

At a news conference in February, Matias Kulfas, an economist and now the Argentine minister of productive development, criticised the previous government for using only monetary policy to tackle inflation.

“In this new scenario, we’re generating conditions for economic reactivation and a drop in inflation that is based on another foundation – a functioning labour force along with different elements of the economy- that can converge in an inflationary decline that is sustainable.”

History of inflation

As the fortunes go, few countries have experienced swings as extreme as Argentina’s. It was one of the world’s richest countries at the start of the 20th century, but decades later became mired in economic chaos and experienced successive recoveries and relapses.

It has tried all manner of prescriptions from belt-tightening in exchange for International Monetary Fund (IMF) bailouts to draining state coffers to fund growth-boosting populist policies. Along the way, Argentines have honed their survival instincts and learned to tolerate high inflation.

Argentina began recording levels of inflation consistently higher than other developed nations after World War II, according to the economic history book The Cycle of Illusion and Disenchantment by Argentine economists Pablo Gerchunoff and Lucas Llach, who was vice president of the Central Bank during the first half of Macri’s administration. 

In 1946, former President General Juan Domingo Peron rose to power by tapping into the grievances of the working classes. One of his first moves was to nationalise the Central Bank and through it, commercial banks issued credits that allowed industry to finance investments and bankroll growing salaries. At first, Peron’s government saw inflation as the most effective way of redistributing wealth because it increased salaries, the economists argued in their book. And salaries did outpace inflation for a period. But when high inflation took hold, the belief that it could be a boon evaporated. By the close of the 1960s, the United Nations said Argentina was among the eight countries with the highest inflation in the world.

Economist Gabriel Rubinstein identifies a vicious cycle that has persisted: “Rough devaluations brought you rough increases in prices, then increases in salaries and increases in tariffs,” Rubinstein, a former governor of the Argentine Central Bank and head of the Buenos Aires firm Gabriel Rubinstein & Associates, told Al Jazeera.

Hyperinflation emerged in the politically volatile and violent 1970s – hitting 444 percent in 1976- the year the military government assumed power. In 1989, a few years after the return of democracy, inflation hit 3,079 percent. Then came the 1990s and a gambit that pegged the peso to the US dollar. That programme ended in ruin, laying the groundwork for the calamitous financial crisis of 2001, when the government locked people out of their bank accounts to avoid a bank run, leading to enormous losses for citizens who could not access their money as the currency devalued.

We live day to day. We can't save, we can't speculate in the markets, and the crisis and inflation overwhelms all of that

by Natalia Zaracho, informal economy worker

Balancing act

Economist Hernan Letcher, director of the Centre of Political Economy in Argentina, describes the country’s inflation problem as a structural one rooted in a dearth of US dollars. Argentina’s economy is effectively bi-monetary – people earn and spend in pesos- but certain commodities, such as real estate, are priced in dollars and past economic crises have driven Argentines to save in greenbacks whenever possible.

“It’s difficult, in an economy like Argentina’s, to have inflation that is less than 20 percent (annually),” said Letcher.

Government-imposed price freezes or controls can play an important role in the equation, added Letcher. But the real issue, he believes, is that salaries consistently fall behind inflation. “We have an economy that is dominated by consumption. So when you lose purchasing power, you have a grave macroeconomic problem,” he said.

It is a delicate balancing act, Letcher concedes, to ensure that salary increases are not gobbled up by price increases. The rising value of the dollar against the peso means higher costs for manufacturers or retailers that need imported goods.  Or in the cost of Argentine raw materials that are priced in dollars because they are also sold on the international market.

Take beef, an emblematic Argentine commodity and a staple in Argentine diets. As the peso lost its value against the dollar last year, the local price of beef soared by 64 percent and consumption dropped.

“We’ve gotten very good at perfecting the methods of adjustment. When there’s an increase in the value of the [dollar], businesses adjust almost instantly to the price,” said Lorena Giorgio, a senior economist at the Buenos Aires firm EconViews.

Added Giorgio: “If you can’t generate confidence in the type of currency that you have, or in your economic plan, it’s very hard to control inflation.”

Natalia Zaracho, who works in the informal economy gathering cartons and other items to recycle, sees its trickle-down effect.  She lives in Villa Fiorito, part of the ring around Buenos Aires hit hard by growing poverty.

“It’s the popular sectors – the barrios – that are the most affected. We’re the ones who end up paying for the policies promoted by neoliberal governments that indebt us. That money doesn’t get to the neighbourhoods, to the health system, to the school or public works,” she told Al Jazeera. “And the markets just speculate, increasing prices, moving dollars around when in the neighbourhoods, we don’t operate with dollars. We live day to day. We can’t save, we can’t speculate in the markets, and the crisis and inflation overwhelms all of that.”

Torre and Vargas, the struggling mortgage recipients, also feel like they’re drowning. They say they’ve cut costs as much as possible, and may soon have to each look for second jobs.

“We want to keep paying,” said Vargas, “but under reasonable conditions.”