Argentina’s continued love affair with inflation…

Prof Martin Feldstein points to recent valiant efforts by Argentina to lower inflation:

When I was in Argentina last week, I was reminded of the devastating power of high inflation. Argentina’s annual inflation rate is now about 20%, down from an estimated rate of about 40% last year. The central bank is struggling to keep the economy on a disinflationary path, with a goal of achieving a 5% rate three years from now.

Inflation in Argentina has been much higher in the past. For the 15 years from 1975 to 1990, the annual rate averaged a remarkable 300%, meaning that the price level doubled every few months, on average. Prices rose at an explosive annual rate of more than 1,000% in 1989, before inflation was finally brought under control.

In fact, inflation was all but extinguished. I remember being in Argentina in the mid-1990s, when there was virtually no inflation. Back then, the Argentine peso was pegged to the US dollar, and both currencies were used equally for day-to-day transactions on the streets of Buenos Aires.

But the subsequent collapse of the peso’s dollar peg, and the forced conversion of dollar contracts into peso contracts at a non-market exchange rate, caused inflation to soar. By 2003, the annual rate had increased to 40%. It then fell to 10% for a few years. But it rose again during the presidencies of Néstor Kirchner and his wife and successor, Cristina Fernández de Kirchner, to 25%. It finally jumped back up to 40% in 2016, propelled by the removal of distortionary price subsidies that had previously been used to disguise the true inflation rate.

The recent high rates of inflation, and the public’s memory of even higher rates in the past, have severely harmed Argentina’s economy.

2 lessons from this:

Argentina’s experience holds two crucial lessons for other countries. First, price stability is fragile, and the inflation rate can rise rapidly. And, second, high rates of inflation remain in the public’s memory and have long-lasting adverse effects. It is important to achieve price stability; but it is just as important to maintain it, by continually managing monetary policy to target a low rate of inflation.

Well, these lessons may apply to others but Argentina is different. As someone said, there are 4 countries: developed, underdeveloped, Japan and Argentina!

On a broader level, in economics we pay way too much attention to something that brings something udner control for the first time – like say  pushing inflation down or pushing growth upwards. Rockstar policymakers emerge from such actions.

However, what matters eventually is maintaining the levels. But very little attention is paid on maintaining something and these efforts are hardly appreciated.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: