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Argentina inflation jumps after peso’s collapse

Argentina inflation jumps after peso’s collapse

12/09 - 17:31 - Rising prices deal another blow to Mauricio Macri’s fading political prospects

Inflation in Argentina has spiked thanks to a sharp devaluation in its currency last month after investors took fright at Mauricio Macri’s crushing defeat in primary elections, dealing the president’s dwindling re-election chances yet another blow.

Prices leapt by 4 per cent in August from the previous month, reversing a sustained deceleration in inflation since April — prices had risen just 2.2 per cent in July. Analysts now expect inflation to jump again in September, hitting real salaries at a time when Mr Macri’s political future hangs in the balance.

The news is especially damaging for Mr Macri, given he had repeatedly pledged upon taking power in 2015 that it would be “easy” to lower inflation, and that high inflation was a sign of an incompetent government. Annual inflation has more than doubled from around 25 per cent in 2015 to 54.5 per cent over the past 12 months.

“Macri set the bar very high when he started his term, and it is coming back to haunt him,” said Juan Cruz Díaz, managing director at Cefeidas Group, a risk consultancy in Buenos Aires.

“This generates greater economic uncertainty at a time when the government doesn’t need any more. Undoubtedly it affects the social mood and the electoral process,” he added. “An acceleration in inflation is clearly bad news for the government.”

Protests have mounted against the dramatic deterioration of the economy that was triggered by a collapse in the peso since Mr Macri’s Peronist rival, Alberto Fernández, triumphed in primary elections in August. That has led the opposition to call for a “food emergency” be declared this week.

Social activists have blocked major avenues, camped outside government offices and stormed into upmarket shopping malls in an effort to be heard, with higher prices making it harder for poorer Argentines to feed themselves properly. “The situation today has reached the scale of a humanitarian catastrophe,” said Juan Grabois, the leader of the disruptive CTEP social movement.

Mr Fernández’s primary victory triggered a sell-off in markets and a devaluation of the peso that forced the government to take drastic action, including announcing a reprofiling of its debt and imposing capital controls.

Although the loss in central bank reserves has slowed down over the last week, “there is no room for complacency,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, warning that it was important to monitor bank deposit withdrawals.

While the government has sought to blame market ructions on investors’ fears that populism will return to Argentina, the opposition has blamed the situation on the government’s disastrous economic management.

“In this battle for who is to blame, the government is at a disadvantage,” said Juan Germano, director of Isonomia, a local pollster, who argued that Argentine voters tend to punish whoever is in power at the time for their economic plight.

“The truth is that it looks very difficult for the government to come back from its defeat in the primaries, given how comprehensive it was. And since then, the economy has only got worse, not better. It would be twice as surprising as the result of the primaries itself was, if they manage to reverse the result.”

Whoever won the elections in October will inherit “a very complicated situation”, said Federico Furiase, an economist at EcoGo, a local consultancy, who predicted that inflation would rise even higher in September.

“Between inflationary inertia, the deterioration of central bank [reserves] and the solvency of the public sector, Macri is leaving a huge challenge that will generate restrictions for the next administration,” he said. “There is no room to finance populism and come out unscathed.”

 

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