Argentine Inflation & Price Controls

A Lesson Never Learned

Precios Cuidados

The Argentine government has recently expanded and extended a price control program that applies to over 1,200 goods in an effort to counter the nation’s increasing price inflation. The latest numbers show a 52.1% year-over-year consumer price increase. The price control program is known as Precios Cuidados (careful prices) and was established in 2013 under then President Kirchner. It originally only applied to 100 products and included 700 products just prior to this recent expansion.

Well, what do you know, as the ruling Peronist party is increasingly struggling to maintain power, the price control expansion came just in time to appease the people ahead of the Nov. 14 legislative elections. Governments feed off the emotions and economic ignorance of the public. The Peronist government has implemented price controls for years, off and on, to no avail in curbing inflation. What a surprise. Readers of Monetary Current know that price controls do nothing to stop inflation but simply distort price signals and cause havoc in the market.

But Argentinians have learned to creatively bypass these controls in the past. Since the program targets specific goods, one mechanism producers used to subvert the controls is by inventing new brands by slightly varying the volume or ingredients of the original product.

For example, let’s say you sell oatmeal raisin cookies called, Oat Crisps, that have 1 tsp of sugar per serving. Well, when Oat Crisps are slapped with a price control, you then may create Oat Krisps with 1.5 tsp of sugar for your business to survive. You see, government intervention breeds absurdity.

Price controls cause shortages, so they are sure to come if not already in the mix. So stay tuned, and when reports of more shortages in Argentina surface, you will know the fundamental reason.

To stop price inflation you must stop monetary inflation.

Argentine Inflation

You can see from the chart below that the value of the Argentine Peso (ARS) vs. the US Dollar (USD) has runaway in recent years. And note that the ARS is even worse off than it looks considering the USD itself is being considerably devalued at the same time.

It’s not surprising when you consider the trend of Argentina’s government debt over the last few decades. At the end of 2020, the government debt accounted for 102% of the country’s nominal GDP, creeping back up to the 2004 high of 117%. The same data is not available (that I know of) for 2021.

And when you look at the growth of the money supply (M2) for Argentina in the chart below, you again see the same trend. This indicates that the government has been servicing their debt by printing Pesos. The result has been a disastrous inflation. Data post-2018 is not available, but an educated guess would indicate that M2 growth continues to approach a straight vertical line.

Again, to stop price inflation you must stop monetary inflation.