The impressive fall in Argentina’s inflation rate since December has resumed after a bump up in June that was due, in no small part, to the effect of reduced subsidies on various items. Cutting such subsidies is an important part of Javier Milei’s strategy to restore order to the country’s finances and to see off inflation, but, as I noted in a recent Capital Letter, while they may be part of the anti-inflationary cure, such cuts can make the disease worse in the short term.
Monthly inflation fell sharply for five consecutive months down to 4.2 percent in May, as against 25 percent in December (and 21 percent in January) in the wake of a 54 percent devaluation of the peso, before rising to 4.6 percent in June. In July, however, the rate fell to 4 percent (roughly in line with expectations) or a modest annual rate of 263 percent, but there’s a catch.
As Bloomberg reported, much of the fall reflected the government’s decision to postpone increases in fuel taxes and utility prices and leave bus and train fares untouched. Without that, according to J.P. Morgan, the rate would have been 1.2 percent higher. The fuel tax and utility price hikes kick in this month.
As an indication of how tough this process is proving for most Argentines, numbers out of INDEC, the state’s statistical office, revealed that salaries had risen by 216 percent in the twelve months ended June 30, badly trailing the 271 percent inflation rate over that period, although more recently salaries have been moving ahead of inflation. According to the bank HSBC, hiring intentions have turned positive for the first time this year. Small signs of light, but something.
Meanwhile, the peso is linked by a crawling peg to the U.S. dollar, under which it depreciates by 2 percent a month. As that’s below the inflation rate, that leaves the currency increasingly overvalued. The official exchange rate is around 940 to the U.S. dollar, while the (“unofficial”) Dólar blu is trading at around 1,340, although that is a slightly narrower spread than a month ago.
The government is under pressure to at least accelerate the rate of depreciation to ease the strain on the economy. However, that would give a fillip to inflation. Milei, confident that inflation will fall below 2 percent a month on its way down to even lower levels, continues to insist that he will stick with the current regime.
That’s one of the races against time that his government is running. Another, in many ways the most important, continues to be whether Argentines have the patience to stick the course. So far, the answer has been yes, although, according to the Financial Times, Milei’s disapproval rating has been moving up and has risen by 5 percentage points over the past two months to 49 percent, but that’s remarkably low given what the country is going through. Milei’s message that there is no alternative is still being heard.
Meanwhile the Peronist opposition has suddenly found itself having to deal with scandals involving its now former leader, Alberto Fernández, Milei’s predecessor.
The Financial Times:
Federal prosecutors presented domestic violence charges against former president Alberto Fernández on Wednesday, following claims by his ex-wife Fabiola Yañez that he repeatedly beat her while they lived in Argentina’s presidential residence between 2019 and 2023.
Leaked photos showing Yañez with bruises on her eye and arm have been widely circulated by Argentine media. Yáñez has confirmed their authenticity, though she said she did not want them released.
Prosecutors became aware of the abuse allegations last week while probing separate claims that Fernández had improperly funnelled lucrative state insurance brokering business to a friend while in office. Fernández’s lawyer did not respond to a request for comment but has denied both the domestic violence and influence peddling allegations. . . .
The fast-moving scandal has deepened a wider crisis for Peronism, the labour-driven political movement that has dominated Argentine politics for 80 years, moving sharply to the left over the past two decades under the influence of fiery former president Cristina Fernández de Kirchner, who is no relation to Alberto.
It remains the largest force in Congress even after Milei’s election in November. Already struggling to find a new leader and a new message following its defeat, the movement is now facing accusations of hypocrisy by voters after Fernández made women’s rights a banner of his administration.
“He said all this about gender equality and he was hitting his wife. What can you say? He’s the best liar in Argentina,” said 75-year-old Manuel in Buenos Aires’ middle-class Chacarita neighbourhood. He identifies as a Peronist but spoiled his ballot in the 2023 elections out of anger over the country’s deep economic crisis.
“Corruption is one thing — I already thought he was corrupt — but to see that he’s hit his wife, it’s shocked me,” said healthcare administrator Virgínia, 62, who voted for Milei. “The Peronists are in free fall.”