May 22, 2013
Inflation, who cares?
Inflation is so notoriously a tax on the poor that a populist government’s total indifference to its continuation remains a mystery — especially when the argument presented since 2003 that inflation is somehow the price of growth no longer applies. But unfortunately there is more than one reason to expect the Cristina Fernández de Kirchner administration to persist on its inflationary path. Firstly, there is CFK’s craving for consistency with her track record after telling the rest of the world for the last few years that the best way out of a spending crisis is to spend even more — as Henry Kissinger once observed, most politicians would rather fail than change. But whatever the adverse inflationary consequences of expanding the money supply 35-40 percent, the Treasury is laughing all the way to the bank because none of the money accruing from the “inflation tax” (perhaps as much as 70-75 billion pesos) has to be submitted to federal revenue-sharing with the provinces — indeed inflation only increases the dependence of the provinces on the central government. But this year in particular we have no reason to expect any deceleration of inflation with the rapid abandonment of transport and utility rate subsidies in the name of “fine-tuning” — the government will presumably accept more inflation as the price of “fine-tuning” just as it previously accepted inflation as the price of growth. Insofar as it accepts that there is any significant inflation in the first place after the denial of the last five years.
And then there is the vexing question of the exchange rate. The CFK administration does not want to absorb the full lag of the last few years, even at the price of a steadily less competitive economy, because the inflationary shock would be too great even by its standards — hence the widening gap between the official and parallel exchange rates. Yet these yawning gaps do not permit the government to resist devaluation altogether with the resulting impact on prices as the last anti-inflationary anchor of the exchange rate weakens.
No real reason, then, to expect this administration to bite the bullet and suffer the short-term political costs of austerity — should we thus expect this scenario of the government gaining from inflation and the rest of the country losing to continue indefinitely? Sooner rather than later inflation without growth is going to hit the purchasing-power of wages and pensions and at that point the government might notice the political mood changing for the worse along with the economy.