- Traditionally, the central bank has made up for the fiscal imbalance by printing more money for the sake of financing public spending.
- This money supply pumping may be a short-term solution, but in the long run, it usually ends up depreciating the national currency, that is the peso.
Inflation has been one of the most severe problems Argentina has faced in the last couple of decades.
The data released by the state's statistics management agency confirms this, with an annual growth rate of more than 211 per cent in 2023, a figure that shows the country to have insignificant economic difficulties.
The exact causes behind this inflationary figure must be understood to consider possible solutions.
Causes of High Inflation
Monetary policy
The main motor that causes inflation in Argentina is the government's monetary policies.
Traditionally, the central bank has made up for the fiscal imbalance by printing more money for the sake of financing public spending.
This money supply pumping may be a short-term solution, but in the long run, it usually ends up depreciating the national currency, that is the peso.
As a result, the exchange rate of the peso devalues, raising the price of imported goods and further accelerating the inflationary rate.
Currency devaluation
To combat inflation, Argentina has taken steps, including the sharp devaluation of the Argentine peso.
These measures include making local goods more competitive in the international market by cutting down on import duties.
However, the negative implications are also inevitable. Devaluation causes the prices of imported goods to go up, including the prices of essential commodities like food and fuel.
Indexation
Another special thing that is very common in Argentina's economic system is the widespread use of indexation in contracts.
This implies that earnings, costs of rent, and other payments are indexed so that they increase or decrease with inflation.
Indexation, by saving people from a decrease in the value of their products, can cause a self-perpetuating inflation loop.
The wages that rise to follow inflation create rising production costs, which might eventually further price hikes and keep inflation going.
Global factors
Even more, external factors, such as geopolitical events and global supply chain disruptions, strongly contribute to Argentina's inflation performance.
Likewise, the recent conflict in Ukraine distorts global supply chains and causes prices for raw materials to spike.
Since Argentina relies heavily on imports for essential goods like food and energy, these global price shocks inevitably feed into domestic inflation.
Potential Solutions
Fiscal Discipline
Argentina's inflation solution requires the comprehensive effort of the government to be restricted and the central bank to be independent of the financing.
One way the government can do that is by imposing fiscal discipline that will help check any expansion of the money supply, which is the main inflation component.
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Exchange Rate Stability
Adoption of more stable exchange rate regimes will enable businesses and households to have a foreseeable macroeconomic milieu, thus mitigating the chance of inflation.
Although a stable exchange rate is important in reducing uncertainty and thus promoting long-term investment, which is key for sustainable economic growth, the other side of the coin is that it might restrict competitiveness in the global market.
Structural Reforms
Structural inefficiencies in sectors like energy and transportation are reasons why production costs in Argentina are too high, and inflation is so high.
These inefficient structures can reduce the scale of production, worsen productivity, and lead to price surges.
Systemic reforms are required to solve these problems.
Social Safety Nets
Along with the government's policies of curbing inflation, it is a must to take necessary measures to make sure the poor strata are not the sole victims of the increasing prices.
Social welfare programs such as cash transfers and food assistance programs are among the most effective tools that can be used to shield those who are the most vulnerable to inflation from its consequences and prevent the prices from increasing further.
Transparency and Communication
The government should be transparent to the public and give clear and understandable information about policies and strategies against inflation so that trust and confidence grow in the people.
Through making the public aware of their plans and objectives the government can help to build a collective spirit of cooperation and responsibility in the struggle with inflation.
The Situation Now
President Javier Milei's new economic program stands out as a whole new economic system that is different from Argentina's traditional economic strategies.
These plans will be unraveled, as it will be eagerly anticipated to know how well they will resolve the country's constant inflation.
However, the impact is still uncertain, making it essential to be vigilant and adaptable regarding adjustments if necessary.
The determining factor of whether these measures will be successful or not will be not only technical details but also political commitment, social solidarity, and support from outside Argentina's control.
Conclusion
Although inflation in Argentina is a formidable challenge, the implementation of a multifaceted strategy, including fiscal discipline, structural reforms, and social security nets, can shape a brighter and more stable financial future.
Only time will tell if Argentina will go into a better situation.
