How Javier Milei is trying to curb Argentina's 250% inflation

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Argentina’s annual inflation rate has reached a three-decade high of 254.2 per cent, even while the month-on-month pace cooled slightly, as President Javier Milei embarks on a high-risk battle to tame price pressures that are set to define the economic fortunes of his presidency.

Milei, a libertarian economist, was elected in November on a pledge to end the South American country’s chronic inflation crises. He said last month that a January rate below 25 per cent would be “reason to celebrate” and a sign of the success of his strategy, which centres on slashing spending to end Argentina’s reliance on money printing.

Data published by the country’s statistics agency on Wednesday confirmed that the increase from the month prior was 20.6 per cent in January, slightly lower than in December, when prices rose 25.5 per cent following Milei’s sharp devaluation of the Argentine peso and the expiry of price- control agreements dating from the previous government.

Analysts said Milei’s fiscal adjustments have helped to contain inflation. But the greater brake on price rises was the onset of recession in Argentina, which the IMF expects will shrink GDP by 2.8 per cent this year.

“We are still in a first phase here,” said Amilcar Collante, an economics professor at La Plata National University.

He noted that the government was relying on the recession to curb prices, and on short-term strategies to cut spending, such as freezing the budget at 2023 levels.

“It is not sustainable,” he added. “At some point the government will need to launch a stabilisation plan that allows us to lower inflation while also growing the economy.”

Milei’s planned cuts to Argentina’s generous energy and transport subsidies are set to lead to significant price pressures in the coming months. Business groups say that many companies face a doubling or quadrupling of their energy bills from February, depending on their size.

Bus and subway fares, for example, are set to rise by as much as 360 per cent in the coming months, officials in some of Argentina’s 24 regional governments have warned, after Milei scrapped a $124mn regional transport subsidy fund and unfroze prices in greater Buenos Aires.

Other inflationary risks remain, including mounting pressure for another devaluation of the peso.

While the government fixes an official exchange rate for the Argentine currency, currently at 820 pesos to the US dollar, it has long traded for less on the black market and several legal markets used by businesses. Rates there now hover around 1,150 pesos to the dollar. 

If the gap between the official and unofficial rates widens, Argentine exporters — including in the crucial agribusiness sector — would be discouraged from bringing dollars into the country, where they must swap them at the official rate with the central bank.

The government badly needs export dollars to replenish the central bank’s negligible hard currency reserves.

A wide gap also makes it harder for Milei to unify the rates and eliminate currency controls, which he has said he hopes to do in mid-2024.

A sharp one-day devaluation, like the 54 per cent one Milei’s government ordered in December, “would be the worst option, because it would open a new rebound of price indexing”, said Fabio Rodríguez, associate director of Buenos Aires-based consultancy M&R Asociados. “[Economy minister Luis] Caputo will try to avoid that at all costs.”

Caputo has been devaluing the peso by 2 per cent each month. Rodríguez said Caputo needed to accelerate that crawling peg to keep the exchange rate competitive before important agricultural harvests begin around April, without raising costs for importers too rapidly and triggering more inflation.

Market confidence in Milei’s economic plan will be critical to controlling exchange rate pressures and curbing inflation. The president, whose La Libertad Avanza coalition (LLA) holds less than 15 per cent of seats in congress, has faced a series of political setbacks in recent weeks.

The government was forced to withdraw a set of tax hikes and spending cuts from congress that were central to its goal of moving from a fiscal deficit of 2.9 per cent of GDP in 2023 to a surplus of 2 per cent of GDP this year. 

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Without legislative backing for a long-term fiscal plan, Milei has instead cut spending that is at the executive’s discretion, including subsidies and transfers to provincial governments. That has ignited tensions with powerful governors and congressional representatives.

“Any further indication that the government will have to give up its fiscal target will mean the economic plan starts to lose its anchor,” said Collante.

“But if it can keep up what it has promised for the next five months despite the lack of support in congress, then by mid-2024 it will be in a much better position to win support [at home and abroad] for a long-term programme.”