By Alejandro A. Tagliavini*
Inflation and rise in the CPI, although they are related, are independent phenomena that are often confused and can lead to very important errors.
As Perianne Boring, among others, rightly points out, the CPI is not a good measure of inflation. And it is less so now given that, due to the repression of people and markets -quarantines and others- consumption habits have changed, as Pascal Seiler, among others, points out.
Let’s see, for example, the report of the Argentine Rural Confederations (CRA) about the cost of food, which rises almost three times more in Argentina than in neighboring countries. According to INDEC, the rise in retail prices (CPI) for March was 6.7% monthly and 55.1% annually, and they grew led by the items education (23.6% monthly), clothing and footwear (10.9%) and housing, electricity and gas (7.7%). Food, despite expectations, did not lead the rises, but instead did so by 7.2% monthly.
Now, it turns out that, in Brazil, the cost of food in March rose 2.42% monthly and 11.62% annually when the rise in the CPI was 1.62% monthly and 11.3% annually. In Uruguay, meanwhile, food prices rose 2.43% monthly in March, while the CPI grew 1.11% monthly and 9.38% annually.
That is, in Argentina, food prices rise almost the same as the CPI while in Uruguay, for example, they rise more than double the CPI. Thus, from the comparison with Brazil and Uruguay, also grain and food producing countries, it is clear that there is a relative variation in prices, demonstrating that the CPI does not measure inflation but only the circumstantial variation in the prices of a basket arbitrarily chosen for the calculation.
As Roberto Cachanosky points out, «In economics, when the prices of some products rise and others fall, it is called a change in relative prices, whether due to endogenous or exogenous causes in the market», such as the international price shocks due to the war in Ukraine- Russia that have punctual impacts on prices. And this relative price variation has a deep social meaning: when a product is scarce, the pressure of consumers -the market- to buy pushes the price up so that more entrepreneurs are tempted to produce that product, and thus meet the needs of people, of the market.
During 2020, Kirchnerism boasted of showing how the strong monetary issue, to finance public spending given the drop in tax collection due to quarantine, did not generate inflation. «On the contrary, the monthly inflation rate showed a declining inflation rate of around 1.5% per month,» says Cachanosky.
However, there was the inflation. «Prices don’t go up, the currency depreciates,» continues Cachanosky. Is that the true inflationary phenomenon is the depreciation of the currency, following the supply and demand curve, like everything in the natural market, that is, when the supply exceeds the demand, the price falls. And here lies the relative relationship with the IPC since, when the peso depreciates, merchants demand an equivalent real value, that is, more pesos. Thus, the best way to measure inflation is by measuring the depreciation of the peso against other currencies, such as the «blue» -illegal- dollar, which moves relatively freely and is not artificially digitized by the government. By the way, it must be discounted that the other currencies, in turn, have inflation.
The blue ended in 2020 with a price of $160.00 for the purchase and $166.00 for the sale, which implied a variation with respect to the previous year (of $87.50) of 52.71% (in accordance with the level of excess issuance, the total issuance having been $2T):
During 2021, the blue ended with a price of $204.50 for the purchase and $208.50 for the sale. Thus, the variation of the greenback with respect to the previous year was ($42.50) 20.38% (according to the excess of an issue that, in total and discounting the trick of the SDRs, was $1.7 T) :
Now, according to the BCRA’s Monetary Report for March, the monetary base fell by around 4.9%, accumulating a year-on-year decline -adjusted for seasonality and «inflation»- of 7.3%. By the way, we must bear in mind that, ironically, inflation causes, although a fall in real terms, a nominal increase in the demand for money. Thus, as a GDP ratio, the monetary base represents 6.1%, similar to that at the beginning of 2020. Consistently, the blue dollar falls in 2022 to $194.00 for purchase and $197.00 for sale, which is that is, a variation of (-$11.50) -5.84% with respect to the last year:
Among the errors that leads to confuse rise in the CPI with inflation is to believe that prices really rise, which is not true. Some rise due to the destruction of supply, of production, but in general they fall due to the fall in purchasing power, due to the drop in productivity. For example, according to Real Estate Report, in Greater Buenos Aires, a «hard price», the value of the square meter in dollars of used apartments, until March was reduced by 8.21% year-on-year, remaining at 2010 levels.
But why is the CPI rising so much today if real inflation – as evidenced by the price of the blue – falls? As we saw, last March the CPI rose 6.7%, led by education (23.6% monthly), clothing and footwear (10.9%) and housing, electricity and gas (7.7%). That is to say, the CPI does not rise today due to inflation, but rather it is a simple adjustment of prices artificially delayed by the government enforcement.
And Cachanosky is right when he warns that «a not very encouraging picture is presented because a strong monetary restriction without downward adjustment of public spending» or sale and dissolution of properties and state entities, I add, will mean a strong adjustment of the private sector, either via a higher tax burden on the formal sector of the market, or with more indebtedness of the public sector -which has already reached a record of USD 376,287 M-, displacing the private sector of the little credit that remains.
Ironically, today there is more real inflation in the US, which is better reflected by its CPI – which rose 8.5% annualized in March – since prices there are freer. By the way, the producer price index, published last week, rose no less than 11.2% and it is wholesale prices that feed retail prices, which would indicate that consumer prices will continue to rise.
Michael Maharrey, wonders why, if the Fed «is fighting inflation and is done with quantitative easing», it keeps raising its balance sheet:
In the week ending April 13, the balance sheet grew by $27.9 billion, hitting a new record of $8.965 trillion. This is up about $3 billion from its previous high in March. As Peter Schiff put it in a tweet, “For all the talk of fighting inflation and shirking its balance sheet, the Fed continues creating more inflation and expanding its balance sheet!”. In effect, the central bank continues to print money out of thin air to buy bonds. This is the exact opposite of fighting inflation.
Thus, for fear of inflation on the part of investors, the yield on US 10-year Treasury bonds shot up last Tuesday to exceed 2.93%:
Now, the problem for emerging countries like Argentina is that US bonds can become a tool for sucking in dollars from the world, since it will not be easy to find other investments that yield more than 3% and at the same time are as safe as these bonds.
* Senior Advisor at The Cedar Portfolio and Member of the Advisory Council of the Center on Global Prosperity, de Oakland, California
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