The chainsaw works and pushes inflation to a two-year low

The ‘chainsaw’ of Argentine President Javier Miley has cut and reduced inflation much faster than expected (it must be said, even at the cost of damaging the economy). As far as inflation is concerned, Miley’s plan continues to make significant progress. It is true that the economy is suffering a notable slowdown, but the cuts in public spending and the reforms in the Central Bank (reduction and restructuring of liabilities) are creating a kind of miracle with inflation, which has decreased to 4.2% in the fifth month of the year. Thus, consumer prices remained at 4.2% compared to April (inflation was 8.8%), continuing on the path of recession with respect to the monthly rate of 25.5% that was registered last December, and the rate that was 11% presented in March. Here you can see the official inflation data with all the information.

“This is the most important thing. A decline is necessary for a recovery, which creates a normality that you haven’t seen in Argentina for a long time,” said Economy Minister Luis Caputo. This significant drop in inflation came just hours after Miley scored a key economic victory with the approval of the Law on Bases and Starting Points for Argentina’s Independence, known as the Bases Law.

Moreover, this inflation data is even more relevant, since a few months ago it was considered practically impossible for Argentina’s monthly inflation to be below 6% due to structural factors. However, Cessation of monetary emission to finance public deficit And spending cuts are helping to erode the monetary base and push prices down faster than expected.

Consumer Price Index (CPI) Argentina grew at 276.4% year-on-year in May (JPMorgan still expects annual inflation of 279%)as reported this Thursday by the National Institute of Statistics and Census (Indec), which confirmed that it remains one of the highest in the world. In fact, the Consumer Price Index (CPI) has not shown any monthly change below double digits since last October (8.3%).

On the other hand, the Argentine stock market and bonds reacted with a sharp rise this Thursday after the approval of the Base Law and the fiscal package in the National Senate. Debt securities also rose sharply, reducing the interest that Argentina had to pay to obtain financing Shares of Argentine companies listed on Wall Street rose by 10% Led by the banking sector. Country risk suddenly fell to 62 basis points 1,420 points the basics

Argentina’s inflation in detail

The official report showed that goods in Argentina had a positive variation of 3.9% in May compared to April. While services grew by 5%, data compared to year-on-year amounted to 279.1% and 270.3% respectively.

The increases recorded last month include the communications sector (8.2%) due to a rise in telephone and internet rates, education (7.6%) following a hike in school fees, and alcoholic beverages and tobacco (6.7%). Cigarette prices have also increased.

Food Inflation

Food and non-alcoholic beverages increased by 4.8% compared to April and 266.3% year-on-year. According to the official report, Argentina’s inflation increased by 71.9% in the first five months of the year. Consumer prices in Argentina increased by 211.4% in 2023. The highest rate since the hyperinflation of 1989-1990 and with a significant acceleration compared to the 94.8% verified in 2022.

It’s not all good news. From JPMorgan they warn that the pace of accumulation of international reserves has begun to slow: “The fact that 20% of export flows are being used to meet the needs of the financial currency market (around $6.2 billion between December and April, according to our estimates) has limited the ability to accumulate reserves more rapidly”, the US bank reports.

“However, the pace of BCRA reserve accumulation has slowed. Despite the type of normalization in agricultural exports, the Bank of Argentina’s aggressive rate cut last month and the delay in the approval of the fiscal package have led to a widening of the exchange difference by 45% on June 4,” warned experts at the US investment bank.