Itaú BBA - Argentina: A moving yardstick

Macro Vision

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Argentina: A moving yardstick

enero 30, 2017

A national CPI should show lower inflation than the current index.

Currently, the CPI published by INDEC (the Argentine national statistics institute) covers only the so-called Greater Buenos Aires area, known as the Buenos Aires Metropolitan area. But publication of a national CPI before the end of this year is likely.

The central bank of Argentina has stated that it will measure the fulfillment of its inflation target (for 2017, 12%-17%) against the existing official CPI with the widest area of coverage.

In 2017, a national CPI will likely be published by INDEC. This national index should show lower inflation than the current index, mostly because energy subsidies outside Buenos Aires were not so substantial. While we expect inflation in the Amba area at 22% for this year, a national CPI would likely hover between 19.5% and 20.5%.    

Making the difference

The central bank set an inflation target range of 12%-17% for 2017. The monetary authority made clear that it will track the official CPI with the widest coverage to check the accomplishment of its target. Indec, the official statistic agency, currently covers the Buenos Aires metropolitan area (the City of Buenos Aires and the main surrounding counties in the Province of Buenos Aires, or Amba). As this index started to be compiled in May 2016, there are no annual official figures for year-over-year inflation yet. However, INDEC already announced that it will soon publish a national CPI. It is not clear if the coming index will co-exist with the current one or it will be the only official measure of inflation. In the latter case, it is not clear if there will be a measure for the whole 2017. Leaving aside these details, a national CPI will likely show a lower inflation than that for the metropolitan area.

A question of measurement

The government of the City of Buenos Aires has maintained a reliable CPI index since July 2012. According to it, consumer prices increased 41% year over year as of December 2016, up from 26.9% in 2015. The surge in inflation last year was mainly due to the necessary adjustments in relative prices (depreciation of the currency and hikes in energy tariffs).  To prevent inflation from entering into a spiral and to tame inflation expectations, the central bank pursued a tight monetary policy. As a result, the pace of inflation in the city of Buenos Aires decelerated to an annualized 19.1% in the second half of 2016, compared with 75% in the first six months of the year.  A similar figure was observed in the Amba index, which increased at an annualized 18.4% in 2H16.

Inflation in the city of Buenos Aires was higher than that in other regions. Headline inflation in the province of Córdoba, compiled by 2016, was 34.4%, and it was 31.4% in San Luis, as estimated at the end of 2016. One reason for the difference is the different weights that utilities (electricity, gas, water) have in the consumer baskets within Argentina. In the city of Buenos Aires utilities account for 2.2% of the total CPI basked, but in the Amba area, the weight is 1.58%. That would explain why, despite facing similar tariff adjustments, inflation in the city of Buenos Aires was higher than that reported by INDEC in 2H16. A second (and more important) difference is that subsidies outside the capital were lower than in the city of Buenos Aires. In fact, the weight of utilities is higher in the consumption baskets of provinces like San Luis or Córdoba (3.78% and 5.6%, respectively), but inflation there was lower than in the city of Buenos Aires. Average utility tariffs were adjusted 228% in average in 2016 in the City of Buenos Aires, compared with 59% in Córdoba or 84% in San Luis.


A new index is coming

The construction of a national index is not an easy task. A fast proxy for a national consumer price index can be constructed using the provincial CPIs with complete information for 2016.  But given the lack of continuous series and reliable data, that sample is reduced to the indexes produced by the Province of Córdoba, the Province of San Luis, the Province of Santa Fe and the Amba area (filling in the missing first four months using the City of Buenos Aires index). Using the same approach as the central bank in its most recent monetary policy report, the indices are aggregated using the percentage of each district (or region) in the total national household spending, according to the 2004-05 survey. While headline inflation in the City of Buenos Aires was 41% in 2016 and 39.3% in the metropolitan area, it was 35.6% in the proxy for the “national” area. For core inflation, the results were 35.2%, 33.7% and 32.8%, respectively, but we note that the sample here is more limited, as core indexes are not published for San Luis and Santa Fe provinces.


Energy tariff hikes will likely continue in 2017 and will impact the evolution of consumer prices in the metropolitan area and to a lesser extent in the interior of the country. We forecast inflation of 22% in 2017 in the Amba area. The impact of energy tariff hikes on consumer prices will likely be diluted in the national index.

According to our estimates, inflation at a national level would likely end this year between 19.5% and 20.5%, assuming that energy tariffs will be adjusted on average between 60% and 112% and only in the city of Buenos Aires. Although this is still 2.5-3.5 percentage points above the upper bound of the central bank’s target, it is consistent with a substantial disinflation process in Argentina. The difference between Buenos Aires and provincial inflation is likely to narrow in the coming years, but it will still be material in 2017, and potentially important for monetary policy and the yield curve.


Juan Carlos Barboza
Diego Ciongo


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