Argentine Inflation Is Picking Up Speed

Prices will double this year as the country's economy stagnates

For Argentines, it's the latest retail sensation. To stem a sharp surge in poverty triggered by a 33% rise in prices of basic foodstuffs since January, the government of President Eduardo Duhalde is sponsoring "discount centers" around the country. Argentines once shopped at Wal-Mart Stores and Carrefour, proud of the world-class retail chains operating in their nation. Now, the bite of poverty drives them to these makeshift markets, where small farmers and other food producers sell directly to consumers. "Saving just 10 centavos on flour will make the difference between feeding my family today or not," says Maria Ibañez, a 37-year-old single mother of two shopping at one of the centers outside Buenos Aires.

Ibañez and her compatriots are having to contend with an old Argentine scourge: galloping inflation. The country thought it had that evil beat when it pegged the peso to the dollar in 1991. But since Duhalde floated the peso in January, it has shed more than 70% of its value against the greenback, pushing up the price of everything from candy bars to computers. Inflation is now running at 28.4% on an annual basis, and economists expect it to top 100% by yearend. Brazil, in contrast, logged inflation of only 8.9% in 1999, the year that it devalued its currency.

Although Argentina still is a long way from hyperinflation, the country's citizens are dusting off survival strategies honed in the late 1980s, when annual inflation ran well into the four digits. From newspaper vendors to major corporations, everyone has been hoarding dollars--and in the process further driving down the peso's value, thereby providing more fuel for inflation. People queue overnight outside exchange houses or search out unlicensed currency brokers. Dubbed "financial caves," these discreet, unmarked offices are cropping up in downtown Buenos Aires. With a six-month freeze on deposits still in effect, no sane Argentine would entrust greenbacks to a bank, even though some now offer interest rates of 125%.

Consumers aren't the only ones reverting to old habits. The government already has printed more than twice the $3.5 billion in pesos it originally budgeted for all of 2002, in a desperate attempt to keep the tottering banking system solvent. And these figures don't even include the estimated 5 billion pesos worth of scrip printed by Argentina's cash-strapped provincial governments to pay their own bills. Economists figure the overall money supply has expanded by 40% since December, further stoking inflation.

One of the few factors keeping hyperinflation at bay is Argentina's moribund economy. Four years into a biting recession, gross domestic product is expected to shrink by as much as 16% in 2002. Consumer demand has all but collapsed, so companies are hard-pressed to pass on the full costs of the devaluation. The proof is in wholesale prices, which have risen by 72% so far this year, more than double consumer-price inflation. To hold the line on prices, companies have been laying off workers and sacrificing profit margins. Foreign auto makers with local operations are no exception. "Overnight, Argentina went from having some of the most expensive cars in the world to some of the cheapest," says Horacio Delorenzi, president of Argentina's Auto Dealers Assn.

The government has so far resisted calls to grant big wage increases to public workers or permit the indexation of wages to inflation, a common practice in the days of hyperinflation. But with 54% of Argentina's population now living below the poverty line--up from 35% last October--such resistance could well give way. Already, in the private sector, heavy industry has agreed to a $100-a-month raise to the country's 3 million unionized workers. If the trend spreads, Argentines may be in for an even bigger bruising.

By Joshua Goodman in Buenos Aires

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE