Itaú BBA - ARGENTINA – Inflation strongly surprises to the upside, triggering changes in the exchange rate poli

Macro Latam

< Volver

ARGENTINA – Inflation strongly surprises to the upside, triggering changes in the exchange rate poli

abril 16, 2019

The bar for foreign exchange sales by the central bank is now lower

Headline inflation exceeded expectations in March, driven by food, seasonal products and regulated prices. Consumer prices rose 4.7% mom from February, above the 4.05% Bloomberg consensus forecast. The annualized measurement of the last three months rose to 56.4% (from 44% in February), while the annual reading marked a new record high (54.8%, the highest figure in 27 years).  

Core item prices also climbed higher. Core inflation came in at 4.6% mom (up from 3.9% in February), led by food and beverages. At the margin, the core reading is running at an annualized 57% (last three months), up from 45.9% in February. The last twelve-month inflation reading jumped to 55.6%, from the previous 52.5%.

 Regulated prices increased, led by new hikes in transportation fares, fuels and electricity tariffs. Regulated prices rose 4.9% mom, while the annual reading hit 58.9% (up from 54.5% in February). Finally, inflation of items affected by seasonality rose 4.8% mom, due to price increases for educational services, bringing the annual reading to 40.9% (from 36.5% in February).

 Concerns regarding the generalized use of indexation in the ongoing wage bargaining season (and consequently, risks of higher inflationary inertia) further deteriorate the inflation outlook. The price tracking consulting firm Elypsis currently estimates a 4.0% mom increase in consumer prices for this month, due to the announced price hikes in gas tariffs, public transportation, gasoline and housekeeper wages. 

The political cycle and uncertainty about the outcome of the presidential elections is another obstacle to disinflation. Tomorrow, the administration will likely announce an agreement with producers and retail shops to freeze the prices of 40 basic products for 180 days. While the measure, in our view, will not have a material impact on the CPI, it signals the government’s concern in maintaining support for the October election. The central bank, for its part, has tightened its monetary policy stance, which in turn led to an increase in the Leliq rate to over 65%. Furthermore, it announced after the release of March’s CPI a freezing of the limits of the non-intervention zone until the end of this year (in the USDARS 39.75 – 51.45 range), meaning that the bar for foreign exchange sales by the central bank is now lower (the non-intervention zone was being adjusted daily at a monthly 1.5% pace). At the same time, the monetary authority said it will not buy dollars if the peso trades stronger than the lower bound (turning the lower limit of the band symbolic). So, authorities are taking another measure aimed at keeping the exchange rate stable in the short-term (the central bank is also auctioning daily dollars lent by the IMF to the treasury). We recently revised our forecasts for inflation this year to 40%, from 35% in our previous scenario. We also expect higher interest rates by December, at 45%, up from 37%.

Juan Carlos Barboza
Diego Ciongo



< Volver