Argentina's Stalled Fight Against Inflation under Milei

 Milei’s inflation fight stalls in Argentina The final stretch of reining in price increases is likely to be difficult, warn economists By Daniel Politi in Buenos Aires

Javier Milei’s push to bring down Argentina’s chronic inflation is stalling, with the monthly rate hitting 3.4 per cent in March — its highest level in a year — as economists warn that tackling the final stretch could be far harder than halting the crisis at its peak.

Inflation has fallen sharply from the double-digit monthly rates Milei inherited when he became president in 2023. However, the monthly rate bottomed out at 1.5 per cent in May and hit 2.9 per cent in both January and February.

“The number is bad. We don’t like the number because inflation is repugnant to us,” Milei stated after the data was published. “However, hard factors allow us to explain what has happened and especially to expect that in the future inflation will return to its downward path”. The libertarian president has suggested inflation could soon “start with a zero,” meaning a monthly rate of less than 1 per cent.

Economists remain sceptical, particularly as the energy price surge caused by the Iran war adds fresh pressure to already sticky price dynamics. While the annual rate of nearly 33 per cent is a significant drop from its peak of nearly 300 per cent, it remains among the world’s worst. Lorenzo Sigaut Gravina, an economist at Equilibra, noted that it is easier to reduce inflation from 30 per cent a month to 3 per cent than it is to move from 3 per cent a month to 3 per cent a year.

Milei initially relied on holding the peso’s exchange rate steady to anchor prices. When the government allowed the currency to move more freely as part of a deal with the IMF last April, inflation began climbing again. Without a firm anchor, the government must now combat deep-seated inertia built up over years. In Argentina, habits such as shopkeepers raising prices pre-emptively, families stocking up on staples, and rental contracts with automatic quarterly increases are difficult to break.

Furthermore, wages are often negotiated based on past inflation, which can feed future price rises as companies pass these costs to consumers. While manufactured goods prices are being held down by a semi-floating exchange rate and fewer trade barriers, the costs for utilities and other services are still rising after years of subsidies.

The government has resisted an explicit inflation-targeting policy for the central bank. Gabriel Caamaño, an economist at Outlier, argues that in the absence of an exchange-rate anchor or a clear policy framework, the disinflation process has lost its engine and is at an impasse. This impasse persists despite a plateaued economy and weak growth.

Argentines are feeling a significant squeeze; for instance, meat prices in Buenos Aires surged 6.9 per cent in March. Food prices nationwide rose 3.4 per cent that same month. Wages in the formal sector grew at only about 2 per cent in February, falling below the rate of inflation.

The cumulative effect is a significant erosion of living standards. Real incomes for approximately 14.5 million formal sector workers and pensioners are roughly 8 to 10 per cent lower than when Milei took office.

Recent polls reflect this deterioration, with concerns about stagnant real wages and rising unemployment—which has reached 7.5 per cent—now outweighing inflation as a priority for voters. Milei’s approval rating has fallen to 36.4 per cent, down from 49.5 per cent during his first month.

The government has also faced scrutiny regarding its inflation measurements after delaying a planned update to the consumer price index (CPI) basket, which led to the resignation of the national statistics agency head. While economists suggest the numerical impact of this delay has been negligible so far, they warn that failing to update the index carries a reputational cost in a country with a history of manipulated data.

The Iran war has caused a surge in energy prices, which is creating significant new pressure on Argentina's already "sticky" price dynamics. This external factor is one of the primary reasons economists are skeptical of President Milei’s goal to bring monthly inflation down to less than 1% in the near future.

The impact of these rising energy costs is compounded by internal policy changes and economic habits:

• Subsidy Reductions: While global energy prices are rising due to the war, local costs for utilities and other services are also increasing as the government continues to roll back years of subsidies.
• Inflationary Inertia: Some utility costs in Argentina automatically adjust based on past inflation, meaning that previous high inflation rates continue to drive current price increases.
• Stalling Disinflation: Economists warn that these rising energy costs are contributing to an "impasse" in the disinflation process, making it much harder to reduce inflation from its current monthly level of around 3% than it was to bring it down from its peak of 30%.

The semi-floating exchange rate currently acts as a mechanism to hold down the prices of manufactured goods.

While other sectors of the economy are seeing price increases, manufactured goods are experiencing more stability due to the following factors mentioned in the sources:

• Currency Management: The semi-floating exchange rate helps prevent the sharp price spikes often associated with rapid currency devaluation.
• Trade Liberalization: The effect of the exchange rate is bolstered by the removal of certain trade barriers, which further assists in keeping these prices in check.
• Sector Contrast: This trend contrasts sharply with utilities and services, where costs continue to rise because they are still being adjusted for past inflation and the reduction of government subsidies.