Luis Caputo, the Minister of Economy, is optimistic that inflation may reduce to zero or even become deflationary by the end of the year. He reassures that there are no macroeconomic reasons to doubt this scenario, pointing out the current recession, a 50% idle production capacity, and a lack of monetary issuance to support the Treasury or pay interest on liabilities. Additionally, the exchange rate remains stable, moving at about 2%. This message was conveyed to supermarket leaders and various business leaders during meetings this week, and government officials echo similar sentiments when speaking with the private sector. They firmly believe inflation is on the verge of collapsing.
However, it raises the question: does Caputo mean that inflation will hit 0% by year-end or that there might be a specific month when it does? Close sources to the minister suggest the latter. Some economists share this view, noting that a specific catalyst, such as reducing the PAIS tax to 7.5% or eliminating it entirely, could result in temporary deflationary shock. Nonetheless, economists like Lorenzo Sigaut Gravina from Equilibra caution that as long as the exchange rate moves at 2% and other prices are rising quicker, reaching 0% inflation seems unlikely. He emphasizes that the government must first align inflation with the exchange rate to maintain competitiveness.
Fausto Spotorno, another economist, estimates that inflation for July could finish at 3.8%. If this downward trend continues, the year-end figure could be around 1%. According to Spotorno, the government is implementing significant monetary tightening, and achieving 0% inflation is heavily dependent on public expectations.
Despite the belief that inflation is decreasing, a strong monetary squeeze from the Central Bank and a persistent recession—which shows no clear improvement—are contributing factors. The current economic outlook suggests that without more monetary issuance, a re-monetization is expected, meaning the competition for pesos should stabilize prices.
Caputo’s recent announcements were meant to signal that, in the medium term, pesos will become increasingly scarce. The lack of issuance to fund the Treasury and repay interest will be compounded by the Central Bank’s efforts to sterilize pesos resulting from foreign currency liquidation. An official source indicated that this scarcity may drive prices up against goods, potentially leading to 0% inflation.
According to government data, the consumer basket had a 3.3% increase by July 24, matching the growth observed in June. However, excluding fresh products like fruits and vegetables—which have seen significant price hikes due to colder weather—the same basket increased by only 1.4%, compared to 2.4% in the previous month. When focusing solely on food and beverages without fresh items, the rise was merely 1.1%, down from 2.7% in June.
Additional economists consulted about the possibility of achieving 0% inflation before year’s end expressed skepticism. Guido Lorenzo highlighted the challenges, noting the existence of long-standing indexing mechanisms that create inertia, making it tough to eradicate inflation entirely. While there may be relative price adjustments still required, economic currency policy also plays a significant role. A more favorable scenario might see inflation converge with the monthly devaluation rate.
Gabriel Caamaño pointed out that before reaching the 0% inflation goal, the government should consider raising tariffs and using a crawling peg approach. Otherwise, aiming for this target could result in deflation for non-tradable goods. He stated that while achieving 0% inflation in a single month is feasible, sustaining that rate appears unlikely. Miguel Kiguel echoed similar sentiments, remarking that current underlying inflation stands at 3.5% to 4% monthly, which is already a notable achievement.
For the firm Equilibra, inflation in July might dip below 4% as there were no regulated price increases, but lowering inflation to zero seems excessively ambitious. Sigaut Gravina believes this monetary squeeze could bring inflation closer to 2%, but anything lower is improbable. Ultimately, he stressed the importance of observing how the government manages inflation, emphasizing that a prolonged effort is needed to aim for 0% price increases sustainably.
Image and News Source: https://www.infobae.com/economia/2024/07/25/puede-llegar-a-cero-la-inflacion-este-ano-el-diagnostico-del-gobierno-y-las-dudas-de-empresarios-y-analistas/
