MercoPress. South Atlantic News Agency

Argentine June inflation triggers controversy

A day after it was officially announced that June's consumer price index in Argentina had jumped an unexpected 0,9%, Economy minister Roberto Lavagna tried on Thursday to sooth market expectations saying that “inflation is reasonably under control”.

However in the first six months of 2005, inflation in Argentina has reached 6,1%, (double the 2004 index) when the annual target is between 7,5 and 10%, and the IMF has been particularly critical of the current monetary and exchange policies.

Argentina, --contrary to Chile and Brazil whose currencies have appreciated considerably in the last 18 months--, has been pumping money into the economy in an effort to keep the exchange rate in the range of 2,9/3 pesos to the US dollar to preserve the country's export sector competitiveness.

"We're not expecting a tightening of monetary policy", said Economic Programming Deputy Secretary Sebastian Katz.

Mr. Lavagna during a finance seminar argued that "the transfer of the 2002 devaluation (65%) described as "repressed inflation" to the general level of prices has been slower than in previous Argentine financial crisis and even slower than with the Brazilian and Mexican crisis".

Actually the June index was significantly pushed by increases in Food (0,8%), Public utilities rates, rent and homes maintenance which averaged 4,1%. As a consequence the basic food basket price index increased 0,4% in June reaching the equivalent of 121 US dollars, in a country where half the 38 million Argentines have been described as living below the poverty line, and the average take home salary is 200 US dollars.

"I wouldn't say that the current monetary policies to ensure a competitive and stable exchange rate in line with productivity are a factor accelerating inflation", said Mr. Katz adding that "economic policy still has plenty of margin to deal with the process of price adjustments in an economy in the midst of recovery, and naturally this can have an effect on inflation and relative macroeconomic balance".

Wholesale prices in June increased 0,1% and accumulated 3,6% in the first half of 2005.

But some local economists warn that when inflation is well above forecasts, as happened in June, inflationary expectations are triggered, "particularly if it's an election year (October)".

Some analysts are expecting July inflation to be close to 1% since salary increases and a greater government spending could lead to a revolving prices-salary spin as the main trade unions fight to recover incomes.

But Mr. Lavagna in support of his policies underlined that "no magic financial instrument can replace sustainable growth with social inclusion and capacity to honour commitments".

The Lavagna team had an unexpected defender, Inter American Development Bank president Enrique Iglesias who said that the inflation surge was a "natural" factor in an economy that is growing at "very dynamic" rates.

Mr. Iglesias currently in Buenos Aires, even supported the Argentine Central Bank policy of buying dollars in the local market arguing that "a balance is needed between interest rates, the world depreciation of the US dollar and having a high exchange rate which is a strong stimuli for the economy".

"The Central Bank is doing what they can, and I understand them", added Mr. Iglesias.

In the last two months the Central Bank has purchased over 1,5 billion US dollars in the Buenos Aires money market to stop the Argentine peso from appreciating.