U.S. Fed Official: Argentine Inflation Will Worsen

Inflation in Argentina will almost certainly get worse this year, a prominent U.S. economic official said Tuesday.

In a speech about the “stunning” fiscal problems facing the U.S. government, Thomas M. Hoenig, president of the U.S. Federal Reserve Bank of Kansas City, said Argentina’s inflation problems are about to get worse.

Hoenig cited Argentina as a warning to the U.S., whose own fiscal problems are so serious that it could face “hyperinflation” in the years ahead if it doesn’t get its finances in order. Hoenig said the U.S. government needs to reign in its fiscal problems voluntarily so that harsh measures aren’t imposed on the country by an even worse economic reality a few years from now.

“An example of both the political pressure that can be exerted on the central bank, as well as the inflationary consequences of debt monetization, is currently playing out in Argentina. The president of Argentina recently forced out the Governor of the Central Bank because he would not transfer reserves held at the central bank to repay Argentinean debt. Inflation in Argentina is currently running near 8 percent and will almost certainly increase.”

In reality, Argentine inflation is running much higher than 8%, according to virtually all economists here and abroad who study the problem. The 8% figure is the official inflation rate reported by the government statistics institute, Indec.

But economists have questioned the veracity of Indec data since 2007, when then-president Nestor Kirchner rolled heads at the institute, and replaced many of Indec’s most senior officials. Following the changes, Indec started publishing inflation data that diverged substantially from private sector inflation estimates.

The gap between official data and private sector estimates started to diminish late last year amid a recession. But the gap began rising again last month, when Indec reported that monthly inflation was 1%, less than half of what economists estimated.

Economists say the government is cooking the books to make inflation – and other data – appear innocuous or better than expected.

The government has repeatedly denied it manipulates the data, saying such accusations are nonsense propagated by coup-mongers, enemies of the state and the media. However, in off the record conversations, even some government officials admit that Indec’s data are inaccurate.

Whatever the case, almost nobody in Argentina trusts the government’s data. Price hikes are frequent.

Everyone who lives here has seen prices rise by more than 8% over the past year. Distrust in the government data is itself a problem given that untrustworthy data tend to worsen and exaggerate inflation expectations. Those expectations, in turn, can actually fuel inflation, leading people and companies to demand more for their goods and services simply because they expect their own costs to rise.

On average, economists here expect inflation this year to total at least 20%, though some fear that government “ignorance” about inflation and its causes could lead the rate to spiral even higher.

That would be bad news for Argentina’s poor, who are always the hardest hit by rising prices.

Economists say the government’s poverty data are also suspect, noting that the number of poor people has been on the rise since mid-2007.

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