Inflation is multi-causal but the vaccine is produced in the Central Bank

As I already counted more than once, The world ended the inflation pandemic when the countries decided to centralize the responsibility of combating it in their Central Banks. To do this, they gave their authorities the credibility and institutional support required, and legally limited the monetary issue to finance their fiscal deficits. The Central Banks gained reputation and the confidence of the public in their task of defending the value of the currency they issue, supported by this tripod: credibility, centralization of responsibility and instruments to exercise it efficiently. In turn, the role of the Trade Secretariats focused on establishing the levels of tariff and non-tariff protection for imported goods and on ensuring internal competition and consumer defense. In short, two very different objectives. The Central Banks to combat the inflation rate and the Trade Secretariats to define internal and external competition in the markets.

As the kind reader and the kind reader surely intuit, in Argentina, with the excuse that “inflation is multi-causal”, everything was mixed. Responsibility for inflation was diluted between the Central Bank and the Secretary of Commerce. What’s more, in practice, The primary responsibility for inflation was given to the Secretary of Commerce, while the Central Bank functioned as an additional box of the Treasury. Obviously, this institutional disorganization led to the destruction of the value of the currency, making the peso a quasi-currency and the dollar the reference currency for Argentines.

That is why now, the multi-causal Argentine inflation depends, fundamentally, on the price of the dollar. And since the price of the dollar, in turn, is linked to monetary policy and the stock of reserves, at the end of the day, the key to controlling inflation is held by the Central Bank and not by the Secretary of Commerce. But since the Central Bank does not have the appropriate institutional framework, or reputation, or credibility, it lacks the capacity to influence inflation expectations, therefore, it cannot convince “by word of mouth” as most of the world’s central banks do. , if not that you have to convince “with dollars.” When the Central Bank has many dollars in its reserves and the State has a fiscal surplus or few emission needs, the inflationary regime in Argentina has a “family resemblance” with the more civilized inflationary regimes. Instead, With few reserves, negative prospects to increase them, and the Treasury with a fiscal deficit financed with issuance, Argentina has a “wild” inflationary regime that, sometimes, due to the deterioration of political conditions, becomes hyperinflation.

Today we are in the middle of that “savage” regime. In reality, we have been under that regime since the exchange crisis of 2018, moderate, at the time, due to the agreement with the IMF, the recession and a very tough monetary policy, and later resumed by the explosion after the PASO, when expectations Kirchnerism “coordinated” a greater dollarization of portfolios. A Central Bank without reserves and a Treasury in need of the issuance of pesos in amounts equivalent to 5 or 6% of GDP, explain Argentina’s inflationary multi-causality. In part of last year, there was some moderation due to the COVID recession and the demand for pesos as a precaution, but as soon as the restrictions on mobility began to be lifted, as of September, we returned to the current regime.

The issuance of pesos is transferred, after a certain time, to the demand for dollars. That demand increases the gap. The gap directly or indirectly affects the Central Bank’s reserves. Then a perverse circle accelerates. The Central Bank increases controls on imports and the movement of capital. These controls lead the private sector to focus more on the price of the free dollar than on the official dollar, when defining the replacement costs of its stocks and their profitability. It is there where the Secretary of Commerce makes its triumphal entry, trying to prevent the gap from being transferred to prices, while the Central Bank “delays” the price of the official dollar and uses part of the reserves to intervene in the free dollar market . But As the issuance of pesos continues, and the Central Bank cannot, or does not want to, use the interest rate as a balancing mechanism for the peso market (topic for a more specific note), the pressure on the gap continues, and then, more controls and more intimidation of the Secretary of Commerce. There may be very short-term “little joys”, but this inflationary regime is only cut by another fiscal situation, another Central Bank and a regulatory scheme favorable to capital inflows and investment. But this new regulatory framework needs another political context. .

In short, in the current political context, with the current fiscal, monetary and regulatory scheme, it is impossible to modify this inflationary regime. There may be temporary improvements, if there are any, but they will be that, temporary.

And thank goodness that the rise in the prices of the commodities that we export has allowed the Central Bank not to lose more than the scarce reserves it has, otherwise the situation would have already become unsustainable. And if the Government intends to curb the prices of exportables by closing sales abroad, it runs the risk of further aggravating the situation, because the underlying inflation rate is not going to fall, and exports and reserves are going to fall, encouraging future inflation expectations.

As long as we continue to want to combat inflation with the wrong instruments, Argentina’s multi-causal inflation will continue to be a serious problem.

I don’t know why I remember at this moment the old anecdote that involves two extraordinary actors: Dustin Hoffman and Laurence Olivier, who together filmed a very good movie from the mid-seventies of the last century: Marathon Man. At a stop in the filming, Hoffman tells his colleague that he had not been sleeping or eating for two days, in order to be more likely in the scene in which his character had spent two days without eating or sleeping. Faced with this situation, Laurence Olivier looked at him and said: “Young man, what if you try acting?”

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