01 March 2010

Inflation and How It Affects Us

Today I received an email from a college student, looking to interview me about inflation and how it affects all of us living in Argentina. I thought this would be a good topic to post a blog entry on, so here we go.

How did Argentina put itself in this inflationary bind so quickly?

It was by no means quickly. There are a number of policies that have all contributed to the inflation we are now seeing. The inflation problem is not a new problem and is not something that just recently started. It has been a deliberate and increasing problem that the government has decided, for one reason or another, not to prioritize.

What is the best way for Argentina to bring the peso inflation down?

There are probably a hundred economists who would all give you a hundred answers on this one, but for me the principal problem is two-fold: the deliberate refusal to let the peso appreciate by the central bank (pushing up the price of imports) and the disincentives for investment in the local economy (causing demand to outpace supply).

What is your current occupation, and how has your job been affected by inflation?

I am a business owner and manager and my job has been affected by inflation in several ways. First, I have to constantly monitor the prices of the inputs in my products/services. If I see raw materials increasing, I have to increase prices to maintain my margin. However, if the competition is not raising prices, this option might not be available to me. That means I'm going to either have to accept lower margins or try to reformulate the product/service to use less raw materials if I want to maintain my margin.

How much has your standard of living improved since moving to Argentina?

For me personally, I would say it is about 30% better. I came from a smaller city in the US and housing prices are much higher here in Buenos Aires than where I am from. Coupled with the fact that you can't get a mortgage loan, it means the average family needs to invest much more in housing here. Groceries, eating out, and utilities are cheaper here in Buenos Aires. Anything that isn't made here is much more expensive: electronics, cars, etc. due to the crushing import taxes. Services and things that involve high labor costs, such as construction are cheaper here than in the US. So, it ends up being a mixed bag at best.

How does Argentina's heavy inflation affect its ability to work as a global power?

I don't think anyone would consider Argentina a global power. A regional power, maybe, but certainly not a global one. The biggest effect it would have on external actors would be through their commerce or trade with Argentina. However, just about every company selling goods outside Argentina are pricing their goods in dollars anyway, so the inflation of the peso doesn't really affect Argentina's customers.

How has the exchange rate from the dollar to the peso changed in Argentina since you've lived there?

When I arrived to Argentina the rate was about 2.8 pesos to the dollar. Now the rate is 3.9 to the dollar. So, we are talking about devaluation of 40% in the peso against the dollar.

How much is the average Argentinean affected by the currency?

The average Argentine is directly affected by inflation and devluation. If he or she is not able to negotiate a salary increase to match the rate of inflation, the purchasing power of their salary will shrink and squeeze their monthly budget. On a group level this leads to union conflicts with companies and the government during salary negotiations, protests, social unrest, etc.

1 comment:

  1. Great article, as an argentine, it really nails the actual situation of the country, the fluctuating value of the peso creates distrust in investments, and as a employee i see myself asking for raises each 5,6 months due to constant inflation on the cost of living, foreigners that receive income in a more stable currency will get a better life out of Argentina, but ironically, argentines don't.