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Monday, May 29, 2017

Argentina's New,Honest Inflation Statistics

Welcome backArgentina’s new, honest inflation statistics

The end of bogus accounting
SOME readers of The Economist may be numbed by statistics. To many others, they are the water of cognitive life. Each week at the back of this newspaper we publish official data on 42 of the largest economies in the world—with one exception. Five years ago we stopped publishing the inflation figure for Argentina produced by the government of President Cristina Fernández de Kirchner because we, and many others, thought it was bogus. We substituted an inflation number drawn up by PriceStats, an international data service. A year later the IMF followed our lead, formally censuring Argentina for “inaccuracy” in its data.
This week we are delighted to resume publication of the official inflation number for Argentina. One of the first things that Mauricio Macri did after he was elected as the country’s president in November 2015, defeating Ms Fernández’s candidate, was to restore the professional independence of INDEC, the statistical office. He charged it with drawing up a new, accurate inflation index. This month marks a year since this index was launched. It shows that inflation in greater Buenos Aires in the 12 months to April was 27.5%. That figure is uncomfortably high, but refreshingly honest. Under Ms Fernández, INDEC found that inflation in 2008-13 averaged about 10% a year, between a third and half of private estimates. Under pressure from the IMF, INDEC raised its estimate to 24% in 2014, but private calculations were higher still.

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High inflation was part of the scenery in Latin America until the 1990s. That was in large part a consequence of inequality and populist politics. Small but powerful economic elites resisted tax increases, so governments resorted to printing money to fulfil their campaign promises to the working and middle classes. The rulers relied on “money illusion”: that wage earners would notice their rising nominal salaries rather than the erosion of their purchasing power. High inflation discouraged saving and contributed to inequality—the rich could more easily hedge against it than the poor.
Taming inflation by cutting fiscal deficits and opening economies to trade and competition was an important achievement of the much-derided Washington Consensus in Latin America. A simple cross-country average of inflation in the region fell from 1,206% in 1989 to 4.8% in 2006. But as left-wing and populist governments returned in the 2000s, inflation rose again in Venezuela, Argentina and even in Brazil. What was notable about Ms Fernández was her apparent attempt to deny it by publishing hogwash statistics. At the same time, she threw up protective trade barriers, ran large unfinanced fiscal deficits (despite enacting big tax increases) in the midst of a commodity windfall and subsidised energy and transport tariffs to the tune of 4% of GDP.
Mr Macri has had swifter success in restoring the integrity of Argentina’s statistics than he has had in correcting the other economic distortions that Ms Fernández bequeathed him. The new official index broadly agrees with the many private ones that have sprung up. INDEC will launch a national index in July.
No longer concealed, inflation is proving stubborn. The central bank, whose independence has also been restored under Federico Sturzenegger, its new governor, set a target of 12-17% this year. It is not going to meet it. After tumbling in the second half of last year, inflation has crept up this year. That is partly because the government has raised electricity and gas tariffs, and partly because wage settlements by the powerful trade unions are averaging around 20%.
The bank is doing its best to hit the target: it raised its benchmark interest rate last month (from 24.75% to 26.25%) even though economic growth is still slow. Mr Macri is engaged in a juggling act. He wants to reduce the fiscal deficit (which he is financing with foreign loans), but withdrawing Ms Fernández’s subsidies means price rises in the short term. He wants to get inflation down but needs the economy to be growing faster before an important mid-term election in October, which his government cannot afford to lose. Having initially opted for a swift economic adjustment, this year he has adopted a more gradual approach.
Argentines can reasonably disagree over whether Mr Macri is making the right choices. But at least they are not being kept in the dark about the real state of the economy. Many appear to appreciate being treated as adults: tens of thousands of people took part last month in a semi-spontaneous demonstration to support the government. Low inflation is good policy. An honest inflation index is a democratic right.