This post was originally published on this site
U.S. core consumer inflation was running at a rate of 4.8% in June, trending down but still well above the Federal Reserve’s 2% target. And even though inflation is slowly heading in the right direction, some economists are worried that it might prove sticky.
In Argentina, meanwhile, inflation is running at 150%. Does that country provide any insights for the U.S.?
Economists in Argentina have no doubt that inflation in the U.S. will come down, but Americans will have to be patient, they say.
“I think it will take a while until [U.S. inflation] gets to 2%,” said Andres Borenstein, an economist at Universidad Torcuato Di Tella in Buenos Aires. He thinks it will take at least a year and will require another rate increase by the Federal Reserve.
As economists in Argentina well know, when inflation rates rise, they can take on a life of their own.
“It seems very difficult to rapidly reduce inflation,” said Damian Pierri, a macroeconomist and research affiliate at the Instituto Interdisciplinario de Economía Política, a research institute associated with the University of Buenos Aires.
But, he said, “the message is, don’t worry. Nothing in the States compares to the inflationary environment in Argentina. You’re millions of years away from this problem. I mean, there is no way that you cannot fight back at the level of inflation.”
Several Argentine economists attributed their optimistic outlook for inflation in the U.S. compared with Argentina to political and structural differences between the two countries.
There are different reasons behind the rising prices in the U.S. and Argentina, said Andres Neumeyer, also a professor of economics at Universidad Torcuato Di Tella.
“The source of inflation in Argentina is printing money. … In the U.S., it was just a sequence of bad shocks [due to] COVID and with the war in Ukraine,” he said.
Because U.S. inflation is caused by external factors, he said, “it probably is going to wash out and inflation will fall back to 2%.”
Pierri echoed this idea, saying, “Argentina has a self-generated inflation problem,” which makes it more difficult to combat.
In the U.S., there is “an institutional framework which is credible and which makes the world —not only Americans, the world — believe that you will fight inflation,” he said. In Argentina, however, politicians will have to push people to accept sacrifices in order to stabilize the economy: “That’s recession, that’s unemployment, even higher inflation and even lower real wages.”
As Argentina prepares for an election in October, such sacrifices could be too unpopular for lawmakers to exact. It will be “very difficult” to find a politician “willing to give up at least one election” to do so, Pierri said.
In 2023, inflation in Argentina rose above 100% for the first time since 1991. The rapid price increases are causing a variety of problems.
“Prices and wages go up all the time, but prices go up more frequently than wages,” said Neumeyer. This means consumers have less purchasing power.
It also means, Pierri said, that “it’s very difficult to sustain a real wage.” Another issue is that there is no credit, which he said “forces authorities to conduct a disinflationary policy using nontraditional instruments such as the exchange rate.”
Ever-changing prices make the future uncertain, so most contracts in Argentina, whether for rent, labor or other things, have a term of about three months. This is frustrating for households, Pierri said, because “it’s really difficult to plan your life.”
Although Argentine economists agree about the causes of high inflation in their country, their views on how consumers are responding to it diverge.
Some say the price uncertainty has led to increased caution. “People react to this by being very, very careful with their cash management,” Neumeyer said.
Others say that consumers are spending at the same levels as before the triple-digit inflation took hold, if not at even higher levels. A recent New York Times report backs up the idea that Argentines are rushing to spend their money before the peso loses still more value.
“Here in Argentina, we save through consumption. We don’t save [cash],” Pierri said, adding that the current level of spending activity is quite high.
“You need to generate a major recession to stabilize the economy. And [there’s] no way to generate a recession in Argentina,” he said, because it’s so difficult to standardize the level of activity.
The U.S. government will release the latest consumer-price index figures on Thursday.
Market Extra: July CPI to come in close to expectations as U.S. settles into final mile along the road to lower inflation, traders say
