Why did prices go up by about 20% in one week in Argentina?

With inflation hitting 60% annually in May, Argentina is experiencing a delicate economic and political crisis. Last Sunday (3) there was an aggravating factor that made residents do their shopping before the increase in product prices, which it actually did. The increase has reached 20% in some stores in Buenos Aires.

A survey by Ecolatina Consulting, based in the country’s capital, calculated the price variance in a short period, from June 29 to July 5. Mattresses increased by 18.4%. bicycles 17.4%; TVs 12.7%; washing machines 9.2%; Mobile phones 7.7% and books 5.7%.

Although inflation is a global problem, why is it so evident in Argentina?

Friction between allies Fernandez and Kirchner

Even before the pandemic, the Argentine economy had already been in crisis for years. However, within the government itself, there is a clear rupture between those who support the Vice President, Cristina Kirchner, and those who defend President Alberto Fernandez. The conflict led to the downfall of Economy Minister Martin Gussmann.

He had credibility with the International Monetary Fund, with which Argentina has high debts in negotiations.

In her place, the economist was called Silvina Patakis. She is allied with Kirchner and has already served in government as a provincial secretary in the Home Office, a position in which she has maintained a direct relationship with the Conservatives. Between 2011 and 2015, she held the position of Minister of Economy of the Province of Buenos Aires. After intense negotiations, the appointment of Patakis was the only point of agreement between Fernandez and his deputy.

External debt and low reserves

The arrival of the new minister has shaken the market and investors, as agents are not sure what the line will be and what measures she will take to deal with the country’s external debt and social problems – in addition to inflation, 37% of the population lives on the poverty line. Gusman was due to travel to France later this week to renegotiate a $2 billion debt deal with the Paris Club’s group of creditors.

Foreign exchange reserves are also low, due to rising energy import costs, and as a result, investors are questioning the country’s ability to meet its debt obligations. Government bond yields are among the highest in the world, demonstrating precisely this lack of investor confidence. This year’s truck drivers’ strike occurred only due to a diesel shortage, which has also hurt the economy.

The level of state risk – an economic and financial concept relating to the possibility that changes in a country’s business environment can negatively affect the value of assets – in Argentina rose to 2,654 basis points last Wednesday (6), due to growing distrust about the local economy and the consequences of tensions within the political coalition the ruler.

interest rate hike

To try to contain the price hike, the government recently announced a new rate hike in the country to 52% annually, but nevertheless, the high rate was not enough to contain the prices. There is even a risk of deficiency in some products, such as cereals. Even businessmen have products in stock to try to lower prices.

Most economists understand how irresponsible public spending is as it happened in Argentina, where successive years have exceeded the collection capacity and without any weight that generates any return in the short or long term.