Galloping inflation

[sergio]

I assume that when the purveyor said "expect 5% increases weekly" he meant for the forseeable future. In Argentina one can never predict a year ahead. The purveyor was probably warning the restraurant that at this time prices are going to increase weekly. I agree that if this continued for very long the government would step in. I also agree with the comment about less crowded restaurants. I have cut back, for the first time and most of my friends have done the same. Tourists may help to fill the gap but I don't think there are enough to replace the rest of us.

 

[bigbadwolf]

As a spreadsheet exercise, weekly inflation of 11% yields annual inflation of 20,000% (i.e. the figure for 1989-1990).
As I'm not in Argentina, I wonder what the reasons for present inflation are? Some of it is related to the peson being tied to the dollar, and as the beleaguered dollar can buys less and less on world markets, so does the peso. Thus wheat prices, for example, have quadrupled in dollar terms in the last two years alone. Other commodity prices have increased in similar terms.
But there may be other factiors unique to Argentina: the typical response of the government to fiscal deficits by printing money for itself; and associated with this, inflationary wage demands, as labour attempts to keep pace with the continually increasing cost of living. The root cause is the same: an economy with insufficient productive capacity and sections of the population clamouring for a bigger share of the pie. Is this what's currently occurring in Argentina?

 

[G]

My cousins are saying that for a few times this week COTO and JUMBO both in the Cabildo/ Palermo and Las Canitas area have fewer than ever or NO meat at all! What is happening? If the prices of the things we love have to go up, let it go up - if we want it bad enough we should pay the price - but less food supply? What gives?
bigbadwolf let me tell you that a big well-known Argentina label of a fruit producing company owned by one family for several decades just sold its land, machines, orchards and inventory (lock, stock and barrel) to an American congolomerate. The patriarch wanted out, and we have never seen the old man so scared in his entire life. There must be some truth to your words. My BsAs homeowner's monthly fee rose every month since October 07, and it keeps on going up.
I like Argentina, and I am coming back. I liked it during the good times and I think I will be there even during the not so good times.

 

[bigbadwolf]

In yesterday's FT:

True, the economy has been growing strongly and Argentina has an unusually healthy cushion of foreign exchange. But problems are piling up. For the past three weeks farmers have been blocking roads and refusing to sell their produce in protest at increases in export taxes. Chicken is scarce and supermarket shelves are empty of beef, a political disaster for this most carnivorous of nations - as are the knock-on effects.
Workers in the booming soya industry are being laid off. Food shortages have come in the wake of energy cuts for business users, pushing up prices. The private sector has no confidence in this meddling government's inflation statistics. Independent economists say prices rose by about 20 per cent in 2007 and may have increased by as much as 3 per cent last month.
The government must start producing credible inflation figures and give electricity companies and other industries affected by price controls the chance to adjust their tariffs to reflect costs. Argentina also needs to start preparing for a potential downturn in commodity prices. Unlike its better-managed neighbour, Chile, it has made no progress in building up a stabilisation fund.

 

[donquixote]

How does inflation in Argentina affect those that hold dollars? When there is inflation the country's currency is worth less in the globle money market and the exchange rate is adjusted to reflect the decline in value of the currency. I have not seen an ajustment in the exchange rate peso vs dollar in the last 4 years. How is this possible unless the Argentine goverment is proping up the peso. The Menem government peged the peso to the dollar and we seen what happened. ?????????
DQ

 

[bigbadwolf]

How does inflation in Argentina affect those that hold dollars? When there is inflation the country's currency is worth less in the globle money market and the exchange rate is adjusted to reflect the decline in value of the currency. I have not seen an ajustment in the exchange rate peso vs dollar in the last 4 years. How is this possible unless the Argentine goverment is proping up the peso. The Menem government peged the peso to the dollar and we seen what happened.

Different story now. The peso is pegged to the dollar, but instead of propping the peso up, the government in intervening to keep the peso down. Since the dollar is weakening against almost every other currency, so is the peso. Hence, don't look at dollar-peso rates, look at euro-peso rates. And Argentina probably does more trade with the EU than with the USA. Also, since Argentinian prices have been lower than world prices, inflation has been manageable without massive devaluation upto now. Add to this buoyant global commodity markets where Argentina sells its produce.For these reasons (devaluing peso and high commodity prices) there have been current account surpluses instead of deficits.

 

[donquixote]

Hi bigbadwolf. I will be the first to commend you on your knowledge of economics. I being a BSEE. find economics to be the dismal science. If the above scenerio were true. No 1. a person holding dollars could buy Euro then with Euros buy Argentine peso and then with the pesos buy dollars and make a ton of dinero, move over Warren Buffet. No 2. the dollar in nowhere weakening against the Euro at the rate of inflation we are experienceing in Argentina. It's all very confusing to me. Even a weak dollar should hold it own against the Argentine peso. Yet when you withdraw money from the ATM the exchange rate is still 3.11 pesos to the dollar. I keep hearing that if you are paid in dollars you are better off than if paid in pesos. At least the wages of Argentines go up to offset the rate of inflation
No response is necessary, I would just get more confused. DQ

 

[Catman]

If prices go up as much as it sounds like they're going up, that's bad. Especially if the exchange rate is staying the same.

 

[bigbadwolf]

No 2. the dollar in nowhere weakening against the Euro at the rate of inflation we are experiencing in Argentina. It's all very confusing to me. Even a weak dollar should hold it own against the Argentine peso. Yet when you withdraw money from the ATM the exchange rate is still 3.11 pesos to the dollar.

That is correct. Inflation in Argentina is greater than the weakening of the dollar. Dollar weakness is one factor. Since peso is pegged loosely at 3:1 against the dollar, whenever something is imported from Japan or Euroland it becomes more expensive. And since commodity prices have been exploding in dollar terms, that makes foodstuffs in Argentina pricier as well (unless the government is intervening to keep food prices low by subsidies and restrictions on exports). There are other factors going into Argentinian inflation: I guess the government is up to its usual tricks in deficit financing. Alternatively and additionally, the economy is awash with export earnings and is in any case in the middle of a boom in its usual boom-and-bust cycle. Given production bottlenecks in Argentina and given increases in wages, rapid inflation is inevitable. If these explanations sound too slick, keep in mind the phenomenon isn't completely understood in terms of causes and effects, and economists use jargon (like "cost-push" and "demand-pull") to camoflage their lack of understanding). For example, are higher wages leading to higher production costs leading to a clamor for yet more wage hikes? Or are higher costs leading to higher wage demands which in turn are being passed on by business to the consumer?

 

[pikto99]

"...Or are higher costs leading to higher wage demands which in turn are being passed on by business to the consumer?..."
It's always passed to customer/client. No self-consciousness business owner will cut his profit margin. So London Interbank creates a wave on 4,3%, Federal Reserve following and selling it down for 6-30%. Joe Shmoe bagging for business loan, he got it for somewhat 8%!
Oil trades are is totally manipulated. There are no free (meaning independent) trade market ANYWHERE.Back in 07, via NPR there was a talk about "increasingly dangerousness" of crude oil prises rise. So one "specialist" from TX-based distributors dropped a number during conversation, that from a BP sea-terminal to refinery gates it's released at $23/brl and curernt prices were near $75/brl back then. So who's cutting-up da' profits?
So to speak, if we'll take this legend about "supply and demands" as real, then after 4 years of Iraq's oil control, Kuwait (owned already), tight friendship with Saudies, last year of economical resession in-house, domestic RE market crash (ok, downslope) - WHY would prices not dropping down?In which unforeseeable benefits does everyone will have to work have it's day-time shift to just feel-up the tank? All these "opecs" are pretty much under control and severe manipulation, that's why.And US feds are no longer for us , their citizens. Federal Reserve is privately owned structure. IRS? U'name it.There is no more economies, it's one global marketplace, where China doing light manufacturing by importing commodities and exporting goods, US, Japan and EU are heavy manufacturing and consumers. For agricultural sector (may be) - Argentina, Brazil. Rest of the countries are just on they way of acquisition by we know whom.