Tuesday, January 24, 2006

Inflation's Intimidating Return in South America

In the last two weeks newspapers and magazines in Argentina and Brazil have been commenting on the growing rate of inflation in both countries. Moreover, in Argentina, Ernesto Kirchner's government attempted to establish some mechanism to prevent sudden changes in the prices of key products.

Kirchner's efforts, however, confronted an unwilling Sociedad Rural Argentina, a powerful association of meat and grains producers that has a long history of confrontations with the current president that reached a peak when in the (austral) winter of 2004 the President decided not to assist to the yearly expo and convention of "la Rural," as the association is popularly known.

With La Rural other two major groups (the Confederaciones Rurales Argentinas and the Centro de Consignatarios de Hacienda) representing most of the 190 thousand meat producers in Argentina rejected the agreement proposed by Felisa Miceli, the Economics Minister. Soon after La Rural's rejection, Aníbal Fernández, the Interior Minister announced that the Argentine government will not hesitate to increase the taxes that the Argentine national government imposes on meat's exports.

How rejecting an agreement to limit increases on the price of the meat connects with the need to raise taxes is--at least to my mind--impossible. Taxes should never be tools to punish unwilling political or social actors, much less economic agents and yet--in its desperation to prevent increases in the rate of inflation--the Argentine government seems to be willing to go down a road that will only increase the level of conflict and distrust in its ability to conduct the economy, which ultimately will lead to more tension, distrust, and yes, more inflation.

Despite the partial failure with the foodstuffs producers, Kirchner's ministers have been able to sign agreements with U.S. based Procter & Gamble and with the Molinos firm, that produces and distributes all sorts of foods, breads, and groceries in Argentina. Procter & Gamble will freeze the prices of 31 of its products and Molinos will do it with 9 key products (oil, rice, bread, and pasta).

In Brazil things are not easier for the government of former labor leader Luiz Lula da Silva. On the one hand, the prices of fuel keep growing despite the efforts of the Brazilian government to reach an agreement with the producers along the lines of the one negotiated with the meat producers in Argentina. The key price of the hydrated alcohol went from R$ 1.724 on January 14, to R$ 1.735 on January 21, as a sign of the weakness of an agreement that included this critical type of fuel for the Brazilian market.

As a consequence, the Brazilian equivalent of the Federal Reserve Bank, the Banco Central do Brasil issued a less than optimistic forecast for the Consumer Prices' Index. Two weeks ago, the Banco Central forecasted a 4.58 yearly for 2006. One week later, the Index had gone to 4.61 yearly for 2006, with a rate of growth for the year of 3.5. It is important to notice, however, that for the twelve months going from November 2004 to November 2005, the Banco Central set an inflation rate of 6.22 per cent.

The inflation rates in both Argentina and Brazil still far from the rates reached by the mid and late 1980s that forced the shock plans, but they prove that there is something wrong in the economies of both countries and that the work of the political leaders is not enough to induce the trust to help prevent any new growth of the inflation. Both countries and Latin America at large are aware of the consequences that inflation had for the markets in the 1970s and 1980s and yet, trapped in the labyrinth of populist politics á la Chávez, the political leaders leaders of the region seem to be unable to find the right combination to secure growth and to avoid inflation.

If you are interested on the issue of inflation you can also read from the Archives of this website:

Latin America before the Neo-Liberal Wave

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