Argentina’s inflation rate has risen to as high as 57 percent this year and has stayed at around 55 percent since its peak in May of 2019.

In recent memory, Argentina has been known for two things: Really good homegrown beef and an extremely high inflation rate. Thank god for the high-quality beef, a key trade asset that has kept some value in the economy. However, even the best beef in the world can’t save the economy from an inevitable crash or crisis. Argentina’s inflation rate at the end of 2017 was only 24 percent, still unbearable, but nowhere near as bad as 57 percent. So the question is, what is the reason behind their 30 percentage point spike in inflation and how do we fix it?

Background information on how we got to this point

The Central bank has tried to control the Argentinian inflation rates in the past, but has proven unsuccessful. The Argentinian peso lost almost 51 percent of its value in 2018, and this year has lost 15 more percent of its value compared to the U.S. Dollar. The disesteemed peso has caused an extreme recession in Argentina, where poverty rates have gone up tremendously. The economy contracted 5.8 percent in the first quarter of 2019. This has left foreigners skeptical to invest in the Argentinian peso, but many continued their investments due to confidence in a turnaround. The spike in inflation in 2019 has not only driven most investors to stay away from the Peso, but has also forced banks to ease limits on foreign exchange interventions. The President of Argentina, Mauricio Macri, has been under a lot of pressure to fix the inflation rate or at least make the economy emerge in the right direction. But with election day coming in October, Macri’s chances of being re-elected are diminishing. Macri was elected as a moderate that would be fiscally conservative, a polar opposite to the “free-spending” 2015 president Cristina Fernandez, who originally started the extreme spike in inflation.

The Inflation Spike!

When Macri was elected into office in 2015, he started off with major budget cuts to offset the “free-spending” of Fernandez. Macri was furious with the free public subsidies given to families to get back on their feet from the 1998-2002 Argentine Great Depression that left millions impoverished. He believed that these subsidies caused an extreme spike in inflation and when Macri became elected, he got rid of the subsidies right away. People had relied on many of these subsidies to help provide for their family, and when these were taken away, they were not prepared to pay for things that had previously been taken care of by those subsidies. Once the budget cut kicked in, “Every time a water, electricity, or home heating gas subsidy was reduced, people’s monthly utility bills went up”(PRI.org), which caused consumer spending to go down dramatically. Business’s also had to pay off the utility bills which raised prices on goods and services. The people could not afford the goods and services anymore. The central bank then raised interest rates tremendously, thinking it was a good decision since the safe United States economy among other safe economies were doing it as well. Instead, private investment went down even more, and the recession got worse as inflation skyrocketed.

Lowering the inflation rate and Argentina’s big decision in October!

People put Macri at fault for the whole situation and blame his moderately conservative policies as the leading indicator for the spike in inflation. However, those policies did not spike inflation on their own as Private investors staying away from the devalued peso helped skyrocket inflation as not enough money was coming into the economy. Many are so angry with Macri that they want to venture back to “free-spending” and vote for the ultra-liberal and former president Cristina Fernandez. Citizens believe that Fernandez will at least lower the inflation rates back to 25 percent from 56 percent, since it hovered around there for part of her presidency. However, many of these citizens are uninformed and there are many lurking variables behind the spike in inflation and what caused it. Yes, Macri made the spike in inflation worse with his policies driving investors away, but this crisis could have been avoided if Macri implemented his policies at a slower rate, rather than drastically changing the economy right away which he did. Fernandez will make drastic changes as her free-spending agenda will raise inflation even more, ultimately making Argentina unlivable. Argentina needs a moderate with a fiscal agenda to take over. Macri was not the right fit, but someone who can read economies better than him, use similar fiscal policies, and implement those policies at a slower rate will make the economy better. If the people of Argentina decide to go ultra-liberal with their inflation rates at 56 percent, then an even bigger crisis is inevitable.

Sources:

Main source: https://www.pri.org/stories/2019-05-06/how-argentina-crept-threshold-crisis-again

Source 2: https://tradingeconomics.com/argentina/inflation-cpi

Source 3: https://www.forbes.com/sites/stevehanke/2019/03/16/argentinas-peso-nothing-but-trouble/#1f5a1d262a9a