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What will be the evolution of inflation in the Milei era after 25.5% in December?

After her arrival at the Casa Rosada, Milei launched a “ambitious” reform program, as classified by the International Monetary Fund, consisting of a severe fiscal and monetary discipline and extensive deregulation of the economy.

One month after he came to power, the first relevant indicator of his administration was the December price index. The increase was 25.5%, and According to Milei’s own calculations, inflation in the first part of last month accumulated 18% and – if the trend had continued – it could have reached 45%.

“The inflationary dynamics of the first week of December revolved around 1% daily and the second registered an acceleration to 1.2%, which inevitably led to hyperinflation, which we believe has been avoided up to this point.”, said presidential spokesperson Manuel Adorni.

The evolution of inflation under the magnifying glass

Analysts are breaking down price data to determine What could be the evolution of inflation within the scheme proposed by the new Government.

It should be noted that the most recent economic literature on stabilization plans empirically demonstrates that the most appropriate formula to confront high inflation processes (as is the Argentine case) consists of a combination of applying restrictive fiscal and monetary policies with the so-called “income policies”, that is, price and wage agreements that tend to coordinate expectations and make the adjustment process less painful.

One of the successful cases, for example, was the Israeli stabilization plan implemented in 1985 under the government of Shimon Peresthat managed to lower inflation from 444% annually to 20% in four months, through the application of orthodox (monetary restriction, fiscal adjustment) and heterodox (price and wage agreements) policies.

Fiscal anchor

Meanwhile, the policy proposed by Milei and his Minister of Economy, Luis Caputo, It is fundamentally based on severe fiscal and monetary disciplinedoes not contemplate, at least until now, income policies– and as such It consists of a unique experience that, if successful, will remain in the textbooks.

It is worth remembering that, after inheriting a primary imbalance of about 3% of GDP, the Government’s objective is to achieve a surplus of 2 points, through a combination of spending cuts and tax increases (in addition to the decision not to increase debt). And the Central Bank stops issuing to finance the Treasury imbalance.

In parallel, a process of honesty of relative prices began. A 118% correction was ordered in the official exchange rate and the adjustment rate of the official dollar (crawling peg) was moderated to 2% monthly. Likewise, it was decided to dismantle regulations on different sectors, such as mass consumption items, prepaid medicine or fuel values.

These measures led to an initial acceleration of inflation, but the important thing, according to analysts, is to observe to what extent the measures announced by the Ministry of Economy generate credibility between economic operators and whether, consequently, the inflation rate tends to slow down.

Weekly inflation

For this exercise, it is interesting to analyze the evolution of weekly inflation. The measurements carried out by different private consulting companies show that, indeed, After reaching a peak in the second part of last month, the pace of price increases has slowed.

According to C&T, inflation went from 19.8% in the second week of December versus the same week in November, to a peak of 28.1% in the third (always compared against the same week of the previous month) for then decrease progressively until reaching 23.9% in the second week of January.

A similar behavior yields the data of Orlando Ferreres and Associates. This consultancy calculates the weekly increase in core inflation (an indicator that shows the trend better, because it does not include regulated or seasonal prices).

The greatest increase is recorded in the second week of December, with an increase of 10.1%, which is reduced to 7.4% in the third, 4.4% in the fourth and 3.5% in the initial week of January.

One of the areas in which the slowdown was most noticeable was food, according to data from the consulting firm Eco Go. The largest increases occurred in the second and third weeks of December – 10.4% and 11.3%, respectively – and then fell to 3.1%, both in the last week of last year and in the first week of this year.

According to this consultancy that runs Marina Dal Poggetto, the general price index is projected at 19% for January. Ecolatina, for its part, estimates that inflation will be 21%.

Based on these data, economists tend to agree that, after the initial impact of the devaluation, price increases have eased. In this sense, there is a recognition that the credibility aroused by the program – particularly due to the severity of the fiscal program – prevented a greater transfer of the rise in the dollar to prices.

In the immediate future, The biggest question that arises is the impact that corrections in public rates may have on the indices.

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