The figure was scary both because of its magnitude and because of its projection: the December wholesale price index measured by the INDEC showed an increase of 54%, more than double the consumer price index (CPI) announced a week ago. A first reading could be that prices have not yet fully transferred the entire post-devaluation rise or that they had already anticipated it. The final figure for all of 2023 was 276%, significantly more than the 211% of consumer prices. Everything indicates, then, that in the coming months there will be greater pressure in the retail sector.
The B side. The other part of the equation is what could mitigate these increases: people’s income. The latest estimate of JP Morgan on the growth of different economies in the region, puts a red number for 2023 (-2.1%) and also a projection for the current year (-3%), with an eventual rebound for 2025 (+5.1%). A contrast with what Brazil projects, which with modest results will start 2026 with 6.6% above the 2022 GDP.
This means that only in 2026 will the same GDP level as in 2022 be reached and we will probably have to wait until 2027 to equal the per capita income of that year. A downturn that is already impacting pockets and that will deepen in the coming weeks but the most visible indicator is the purchasing power that is eroding with each readjustment in prices that were directly affected or with more subtle interventions. Although the average increase in the CPI is also very difficult to match for sectors with fixed incomes (salaried and retired), for some sectors it is particularly utopia to be able to run at a speed of more than 210% annually.
If we take a longer period (for example, the last four years) we can observe more precisely which items “beat” the general index and which ones lagged behind. According to a recent study by the consulting firm Invecq, from November 2019 to December 2023, the average CPI rose 1,193% (that is, prices rose almost 13 times) but items such as Clothing (+24%) and Restaurants and hotels (+20%) took advantage if we compare them with the big “losers”: Home services (-56%), Communication (-40%) and Education (-38%).
The dispersion is notable for being a period long enough for momentary distortions to have been corrected. “The inflationary flash in December was expected. As soon as it took office, the new administration began a process of realigning relative prices, in which it adjusted the wholesale exchange rate (+118%) and released some regulated items. dIn any case, there is still a way to go: half of the CPI categories – and the dollar – improved in relative terms, while others worsened their lag (advance) in relation to the general index,” described in said report.
In the shadow of devaluation. For this reason, the correction of the “official” exchange rate at the end of 2023 (starting with the one immediately after the PASO and culminating with the abrupt jump of 120% on December 12) clearly influenced the first link in prices: the wholesalers and especially in the food sector, very sensitive to the evolution of the official dollar. But at the same time, he started the taxi clock: With the promise to devalue “only” 2% each month until March, the erosion of the real exchange rate will depend on the slowdown in prices, on the one hand, and the influx of foreign currency, on the other..
The studies that monitor the evolution of prices moved their analysis to a weekly frequency since they are not only interested in the result at the end of the month but also how it is projected based on movements every seven days. Eco Go, for example, which in December had an estimate higher than the official CPI (28.9%), for now it has been detecting figures of between 5.1% and 5.4% weekly in January. “The magnitude of the inflationary jump and its moderation will depend on the distributive escalation behind it, on the ability to sustain the fiscal promise, on the Central Bank continuing to buy dollars, on the exchange gap not escalating, and on the tolerance of politics and society to the recession that the scheme is going to coordinate”, the consulting firm emphasizes in its latest weekly report.
A predictable photo
The consequences of this price stampede will predictably be seen in the first “photo” that the Permanent Household Survey (EPH) made about the cut last December. Traditionally, inflationary dynamics submerge more households below the poverty line, which takes much longer to emerge than its abrupt fall because income reacts much slower than prices. From the Di Tella University, the Economist Martin Gonzalez Rozada makes an estimate of how these variables (prices and income) are affecting and thus anticipates with great precision what will later be officially communicated. With the data from the last month and always using the EPH methodology, The “nowcast” that estimates the percentage of people living in poor households projects a poverty rate of 42.8% for the second half of 2023.
The final impact will be seen in the second quarter of this year, with more distributive bidding, mainly to accommodate salaries under agreements, claims from the state and retirees due to the dramatic drop in their income. Additionally, there is an issue of weighting. For December, “The monthly inflation rate faced by the lowest-income households was 26.1%, while for households in the 20% with the highest incomes, inflation was 25.4%. And comparing against the same month of the previous year it was 216.4% for the 20% with the lowest income and 208.9% for the highest income households.”explains González Rozada.
According to an Invecq analysis of official data, since 2011 of total new employees, The formal private ones are only 7%, while the formal state ones contributed 25% and the self-employed and informal ones, 34% each group.. What is relevant is that the impact of inflation on the two largest groups is much greater because they do not have their income updated.
The Argentine economy is in this particular race: on the one hand, trying to ensure that the cushion of the official dollar does not dilute before the promise of a good harvest becomes a reality and dollars begin to flow in April. On the other hand, price pressures should not cause the market to expand too much. the exchange gap (is now at 60%) and force another devaluation that generates another jump in the CPI. And on the other hand, the recomposition of income cushions the monetary storm. Of course, the other gap will widen: the bargaining power of the unions that represent the sectors with the most productivity vs. those on fixed incomes or retirees, for whom even a delayed update causes them to lose a good part of their purchasing power
In short, this madness can only stop when the fiscal accounts stop putting pressure on the exchange rate through a monetary imbalance and with it on prices. According to an estimate of Fausto Spotornoin 2023 the monetary issue to finance both the fiscal deficit and the quasi-fiscal deficit reached 12% of GDP, thus equaling the level recorded in 2020, an extraordinary year due to the productive paralysis and the health emergency. A true “achievement” that shows the feet of clay of the Argentine economy: having generated our own economic “pandemic” in times of normality.
