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Dollar and inflation: should we believe the analysts or the Government?

Dollar and inflation: should we believe the analysts or the Government?
February 26, 2024 – 00:00

The truth is that the issuance brake ordered by Javier Milei’s government makes it difficult to predict a maintenance of inflation in these values ​​even at the end of this year.

If this scenario does not enter the minds of price makers, the adjustment will be very costly in terms of recession and social conflict.

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The projections of economic analysts for the end of 2024 according to the Central Bank’s REM, with inflation levels at 230% and a dollar of $1,700, have no basis in the current and projected monetary base levels. Rather, they are equivalent to predicting a great failure of the current monetary policy and, therefore, a scenario with a much more uncertain ending even than that forecast. But the truth is that the issuance brake ordered by Javier Milei’s government makes it difficult to predict a maintenance of inflation in these values ​​even at the end of this year. If the two causes of inflation, the issuance and flight of the peso, are reversing, how are these very generalized forecasts justified?

The brutal relative price mismatch left by the previous government is being poorly managed by economic agents and is due to lack of coordination. It is the government’s role to educate agents and explain to them how they should behave until a reasonable equilibrium of relative prices is achieved. In this particular case, given the President’s unbeatable communication profile, this function should be carried out by himself.

It is true that the issuance that Massa generated to finance his ill-fated presidential campaign was rude: it increased the monetary base by 70% between May and November of last year. And it is also true that this brutal increase was added to a sustained base growth of around 50% annually that his government had already been generating. But that “only” meant Minister Massa’s emission of 135%, since he took office in July 2022 until his silent withdrawal from the scene. The inflation that he left, of the order of 200%, was inflated by the bad expectations that he engendered, which generated a strong flight from the peso (fall in demand for real balances). Current policy, on the contrary, will promote the opposite effect, that is, it will exaggerate the slowdown in inflation.

My interpretation is the following: Given the strong devaluation in December, there were many prices that were already updated to that value of the dollar (MEP or Blue dollar), especially those most dependent on the consumer. Many others, especially wholesalers, were not, except those who had special or blend dollars, which were somewhere in between. Given the devaluation, the ideal situation in terms of returning to a reasonable balance of relative prices would have been for each price to increase depending on the delay it had. But the vast majority of consumer prices increased by percentages similar to the devaluation, if not even more. To make matters worse, this was a devaluation that the government exaggerated, with the aim of “making itself a cushion” and not having to devalue again in three or four months and for the market to read it as a failure. When everyone expected an official dollar of between $600 and $650, the government raised it to $800. It was precisely for this reason that he announced a very low crawling rate of 2% per month and generalized withholdings of 15%: none of this was explained nor, therefore, understood.

The government seems to remain firm in its policy but, so that the recession is not greater than necessary, it will have to coordinate expectations as soon as possible. Otherwise, the equilibrium level will be found only after a new devaluation or after a recession so strong that the prices of consumer goods must fall until they reach the level appropriate to the official dollar. The dollar forecasts precisely assume that the path will be to devalue again to avoid a recession.

The path that the government imagines, however, is very different from that imagined by analysts. What seems to be in the government’s mind is that the entire economy will adjust to this dollar, in order to stabilize (dollarize) at a maximum of $1,000. Since there is no more issue, inflation this year should not exceed 70%, even less if expectations improve, since that was the increase in the issue of the Massa campaign, which will have been the last issue of pesos. Only if the government validates the devaluation scenario, which for now it silently swears not to validate, will 200% inflation be possible this year. Otherwise, there will not be enough pesos for such increases and prices will have to go down. Not those of rates, nor fuel, but that of consumer goods and many industrial inputs, which are still valued at a mix between the official and the MEP with plus the financial coverage that requires having to put the dollars before to receive them from the Central. This will only be accommodated when foreign trade normalizes.

If this scenario does not enter the minds of price makers, the adjustment will be very costly in terms of recession and social conflict. The President is the only one who can explain this with complete clarity and credibility. No one but him can do it and it’s time to do it now. His main political capital is at stake in this.

Economist

Source: Ambito

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