The sharp collapse in inflation in May to 4.2% also surprised market analysts, who had estimated one point higher in the recent Survey of Market Expectations (REM) published by the Central. But the process is still halfway done. Now The official objective is for this index to converge to 2% monthlythat is, at the same rate of increase in the official exchange rate set by the Government.
The new director of the Central and until a few hours ago presidential advisor, Federico Furiase, expressed himself in that direction when considering the drop in the index last month: “Nominality converging to the crawling (adjustment) of 2%, improving real rate and smoothing exchange rate appreciation, with correction of relative prices.”
In other words, the already explicit objective of the economic team is to continue driving down inflation so that it gets as close as possible to 2% levels. This would be the virtuous way to prevent the Argentine economy from continuing to become more expensive in dollars, but not through a devaluation (as almost always happened), but rather through a reduction in inflation.
That path still has many challenges ahead. In June, for example, The index will most likely rebound to be in the 5% to 6% range.. The rate adjustment defined for middle class households will have its impact and will not play in favor of the prepaid reduction as happened last month.
Therefore, what will end up defining the magnitude of this month’s rebound will be the evolution of food and beverages, which last month increased 4.8%, above the general index.
The great effort to try to lower inflation to 2% monthly, as the main objective, will occur in the second semester. Economic consultants project that the objective is still very far away and estimate that it will remain above 5% until September. Only in October would it fall to levels of 4.6%. The good news, in any case, is that the REM consistently overestimates inflation. This means that it would not be strange for the monthly data to be well below recent projections.
In June it is almost a fact that there will be a rebound in inflation but that it would be gradual, placing it in a range of 5% to 6%. The adjustment of rates will have an impact and we must see how the food and beverage category behaves, which rose 4.8% in May, above the general index. Expectations of a greater slowdown focus on the second half
Another problem that the Government must face to continue reducing the level of monthly inflation, after the collapse from the 25.5% registered in December, is the need to continue adjusting rates. In fact, the plan is to continue with the rate adjustment month by month with the objective of reducing subsidies.
The 2% rise in the official dollar and this rate increase in itself puts pressure on monthly inflation. Besides, The Central Bank focuses on the core inflation data, which leaves out regulated prices and seasonal increases. This month it fell even more than the overall measurement, to just 3.7%, which is encouraging going forward.
The additional reduction in inflation will depend above all on keeping monetary aggregates under control. The fiscal surplus at least closed one issuance tap, which is financing the Treasury. On the other hand, the drop in the interest rate liquefied the BCRA’s remunerated liabilities, which are decreasing substantially. And for now there remains the expansion through the purchase of dollars, although later part of those pesos are absorbed by the Central Bank.
Along with the drop in inflation, another great obstacle for the Government simultaneously appears, which is economic recovery. The process will be slow, because it must occur precisely without a greater mass of pesos on the street, as happened in the past. Therefore, it is possible that there will still be a few months left for the price slowdown to have a palpable effect on the recovery of consumption.
