Argentina’s inflation might already have surpassed 100%

There is no doubt that the main monetary policy problem in world over the last five years has been overly tight monetary policy – particularly in the US and the euro zone. However, there are certainly also central banks of the world that have erred on the other side.

Hence, Iran is flirting with hyperinflation and the policies of the petro-socialist regime in Venezuela has sparked runaway inflation. Furthermore, there is no doubt that inflation in Argentina is increasingly getting out of control and that is the topic for this blog post.

Officially inflation in Argentina is around 11%. However, anybody who has just a minimum of knowledge about the Argentine economy knows that the Argentine inflation numbers are as real as Mickey Mouse. Inflation in Argentina is not 11%, but much higher.

According to an alternative measure of inflation the so-called Congressional Index, which is a price index based on private surveys inflation is more likely around 24-25%.

But inflation is likely even higher than that. Surveys of inflation expectations indicate that inflation is running around 30%.

However, I think that it might be even worse than that. One thing that is strongly distorting all of these measures is the extensive price controls that have been put in place in recent years in Argentina. These controls undoubtedly have “helped” curb inflation. However, the underlying reasons for the sharp increase in inflation cannot be removed by draconian price controls. It might have postponed inflation from rising further in the short-run, but sooner or later the underlying inflationary pressures will be translated into actual inflation.

A Hankeian measure of Argentina’s near-hyperinflation

The world’s foremost expert on super high inflation and hyperinflation in my view is Steve Hanke. Steve has suggested to use black market exchange rates as a proxy for inflation when official data is none-existent or manipulated. Steve suggests using the black market exchange rate rather than the official exchange rate when capital and currency controls distort the official exchange rate (as is presently the case in Argentina).

This is Steve (his case is Zimbabwe):

The principle of purchasing power parity (PPP) should be able to come to our rescue. PPP states that the ratio of the price levels between two countries is equal to the exchange rate between their currencies. Changes in the exchange rate and the ratio of the price levels move in lock step with one another, with the linkage between the exchange rate and price level maintained by price arbitrage.

…But does PPP hold during periods of hyperinflation? If not, we cannot use changes in the Zimbabwe dollar/U.S. dollar exchange rate to estimate Zimbabwe’s inflation rate. There is a consensus among economists that, over relatively short periods of time and at relatively low inflation rates, the link between exchange rates and price levels is loose. But as inflation rates increase, the link becomes tighter.

In a study of the German hyperinflation of 1921–23, Jacob Frenkel  (1976) found that correlations between various German price indices and the German mark/U.S. dollar exchange rate were all close to one. Every 1 percent increase in the exchange rate was associated with a 1 percent increase in the price level. Frenkel’s empirical work strongly suggests that PPP holds when a country is hyperinflating. Additional evidence supporting the PPP principle during periods of very high or hyperinflation has been reported for a wide range of countries…

That PPP holds under conditions of very high inflation or hyperinflation should not be surprising. After all, under these conditions, the temporal dimension of price arbitrage is compressed and the long run effectively becomes the short run. For example, in July 2008, Zimbabwe’s inflation was 2,600 percent a month—equivalent to a 12 percent daily rate. That is per day—not per month, or per year. In these circumstances, arbitrage benefits per unit of time are relatively large and transaction costs can be overcome quickly. Accordingly, price arbitrage works to ensure that PPP holds.

Steve in his paper on Zimbabwe utilized PPP and the black market exchange rate to calculate the inflation rate in Zimbabwe. I have used the same method to make an estimate for Argentine inflation. The graph below shows the official price level and the price level implied by the black market rate for the Argentine peso against the US dollar (and the US price level).

Price Level Argentina

The graph is pretty clear – until  2007-8 the official price level more or less developed in line with the price level implied by PPP. However, ever since the price level implied by PPP has grown much faster than the official inflation rate.

This is a very a clear indication just how manipulated the official inflation data has become since 2007-8 and the graph also very clearly shows how steep an increase in prices we have seen in Argentina since early 2012.

Inflation might have surpassed 100%

There is no doubt that inflation has accelerated further in the last couple of months and this is clearly confirmed by my calculation of the PPP implied price level. Hence, over the past three months the PPP implied price level has increased by an annualized rate of 127%!

This is the reason why I would argue that it is likely that Argentine inflation already has surpassed 100% – maybe not on a year-on-year basis, but at least on a annualized basis over the last 3-6 months. This is not just high inflation, but rather an inflation rate that might very well turn into outright hyperinflation (more than 50% increase in prices per month) unless there is a dramatic change in economic policy in Argentina.

It is monetary policy failure – stop the press NOW!

There is no doubt that Argentina’s super high inflation is caused by excessive money supply growth and that is obviously also the case in Argentina where President Cristina Kirchner’s populist government has been funding excessive growth in public finances by letting the printing press running overtime.

Hence, there is only one way of stopping the runaway inflation in Argentina and that is by stopping the printing press. Unfortunately it has hard to be optimistic that inflation will be slowed anytime soon when Argentina’s central bank governor don’t believe that there is a connection between money supply growth and inflation. We live in an age of central banker ignorance.

Leave a comment


  1. troopa

     /  April 12, 2013

    Great post mr. Christensen. You always present some simple methods get answers you need. Thats one of best things about your blog.
    I have a question. When you take black market exchange rate into account, can it be that it overstates the exchange rate relative to some rate that would prevail in a legitimate free market (where official rate is the market rate), because of a supply constraint (for the foreign currencies on the black market)? Could that also overstate your results? I know that even if it does, its probably not very significant when we talk about 50% inflation rates that will eventually spiral out of control.


    • Thank you Petar,

      There is clearly a risk that the method I have used in some way is distorted. However, the fact the dollar market is illiquid exactly is inflationary as the supply of dollars is limited, but the demand (in Argentina) is very large. This tend to make the weakening of the peso more extreme and therefore the inflationary shock even larger.

  2. W. Peden

     /  April 13, 2013

    With an inflation rate like that, isn’t a very sudden deflationary shock required? Although a gradual approach makes more sense in theory, in practice the political economy of disinflation means that voters aren’t going to tolerate prolonged unemployment.

    As far as I know, every country with a trend NGDP growth rate of +10% has only been able to get it down to a permanently slower trend via short shock. In some cases, it took more than one e.g. the UK had tough disinflations in 1980-1981 AND 1990-1992, while the US had milder dislfations in 1981-1982 and 1990-1991 before getting into the Great Moderation.

    Unfortunately, it’s very hard to see anything like a tolerably bad way out for Argentina.

    • William, it could be prove very hard to beat inflation in Argentina. Argentina’s problems at the root really are not monetary, but institutional. The country has historically had extremely unstable institutional, which been prone to crisis. So I think it fundamentally is impossible to have monetary reform with fundamental institutional reforms.

      I must say that I increasingly have sympathy for Steve Hanke’s idea that Argentina should dollarize. That is not economically optimal, but given the very weak institutions it might nonetheless be the preferable solution.

  3. Benjamin Cole

     /  April 13, 2013

    Excellent blogging.

    Yes, what choice does Argentina have except to dollarize? Their national institutions have no credibility.

    That said, they should maybe “yen-ize.” At least Japan is trying for growth….a dollar might be too much of a straightjacket….

  4. Lucas

     /  April 15, 2013

    Lars, you have to consider some facts in your analysis:
    – There’s a non-tampered CPI based on the Billion Prices Project [1]
    – Currency controls are relatively new. They were imposed on October 2011 and strengthened on May 2012.
    – For many years, the devaluation rate was vastly inferior to the inflation rate and the rate of monetary expansion. The recent surge in black market exchange rates might just be a lot of catch-up of a nominal variable that was clearly “out of sync”
    – Also, the rapid rise of the black exchange rate might be a prediction of expected medium-term inflation, not actual inflation.
    So, here’s my take:
    – Actual inflation is 25%, give o take a few points.
    – Expected (short-term) inflation is a bit above 30%
    – There’s quite a bit of repressed inflation in the form of frozen tariffs, price agreements and the like.
    – The market expects the expansive AD policies to continue (there’s an important election in October) and may be already pricing in the beginning of a wage-price-devaluation spiral.


    • Lucas,

      That is certainly all very good points. Is inflation 30, 40 or 100%? We simply don’t know, but my point is that inflation is pretty clearly getting out of control.

      I love the billion price project and like the indications we are getting from that, but the clear accelerated sell-off in the black market rate of the peso indicate that inflation is accelerating very fast at the moment.

      • M

         /  May 14, 2013

        I agree with most of your post, but you should take into account that since the 40’s Argentina had an infation rate of over 10% almost every year and, most of the time, over 20% (the 90’s being the only period of price stability). I’d moderate some of your claims of high inflation, as Argentines (sadly) have expectations around that number.

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