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Argentina’s Andean inflation rate

February 23, 2013

Visit almost any restaurant in Argentina and the menu will be printed on paper and slotted into a plastic binder; not because the owners are cheapskates but because prices must constantly be updated. It’s the original example of what economists call the menu costs of inflation.

The official rate is 10.8% but private estimates suggest it’s two-and-a-half times higher, meaning that prices rise each month by roughly the same amount as in Britain every year. Argentina earlier this month became the first country to get an official slap on the wrist from the International Monetary Fund for fudging its numbers.

Today we made our regular ATM withdrawal and noticed that the fee had risen to 20 pesos from 19.72 in January: even the banks have to cover their costs. We take so much cash out because not many shops take credit cards. By the time Amex, Visa or Mastercard has paid them back the money is worth less. The peso is depreciating about as fast as prices rise, so that every time we visit the cash machine we get a little bit more to the pound.

Another price oddity: we had to buy about 20 stamps to send a parcel home because even the largest denomination is now worth so little.

All these little signs accompany a lot of justified grumbling about the cost of living. Argentina currently tops the Economist’s Big Mac index, which gives a rough idea of the inflation-adjusted price of goods worldwide. Food costs have spiralled so high that they pose a serious threat to the poor.

Per capita income is only a third of Britain’s and poverty remains stubbornly entrenched. The government says income poverty fell to to 6.5% of the population last year although private estimates put the numbers higher. The outskirts of Mendoza, the most recent town we visited, are a troubling mix of corrugated shacks alongside high-walled houses built with wine money. Here, like in Buenos Aires and other big towns it’s common to see children begging. We saw families rummaging through rubbish tips. The Gini coefficient, a standard measure of inequality running from zero to 100, is 44.5 (the higher the more unequal), the same as the Democratic of the Congo and well above the European Union’s 30.

But although income poverty is a problem it has tumbled since the peak of the crisis in 2002, when half of the population was considered poor. Wages are increasing roughly in line with inflation, keeping the cost of goods within reach of most people with jobs. Unemployment was only 6.9% in 2012, lower than in Britain and Europe. President Christina Kirchner in early February unveiled measures to help people on fixed monthly incomes, such as pensioners. The government also struck an agreement with supermarkets to fix prices for two months.

In contrast to London, Buenos Aires is pursuing a strategy of growth — and sometimes inflation can be a price worth paying. Lots of economies, such as South Korea, developed fast for decades with high inflation. The government knows that the only way to tackle poverty is to keep control of public debt and grow the economy. The public debt to GDP ratio is less than half that of the UK and economic growth higher. The Argentinian economy is slowing (which probably means that inflation will fall from its currently unacceptable levels) but last year the economy still grew faster than the rest of the world, continuing its decade-long surge after the crisis. Growth will in turn generate the tax revenues necessary to pay off debt and maintain social spending.

Inflation works to the government’s advantage by eroding the value of debt. Borrow 10 pesos now, and when it’s paid back a year later it’ll only be worth about three-quarters in today’s money (it helps private debtors in the same way). Buenos Aires also benefits from understating its price data because a large part of its sovereign borrowing is indexed to inflation. Some say that’s cheating, but as a cash-strapped government with a history of debt problems and political instability, shouldn’t it be doing everything it can to stay in the black?

All of this is anathema to the International Monetary Fund, which still sings a standard refrain: keep a lid on prices. Don’t print too much money. Don’t overspend on the poor, unemployed or elderly. It’s a refrain that sounds increasingly dated as Argentina prospers regardless. Meanwhile the UK, with its supercharged austerity, suffers its worst slump since the Great Depression.

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