Argentina denies fears of mounting inflation

Argentina’s official annual inflation for 2010 stood at 10.9%, significantly lower than estimates released by independent consulting companies, which suggest an inflation rate of around 25.0%.

With growing pressure for price and pay rises in line with the unofficial figures, inflationary pressures within the economy are rising, eroding income potential for both consumers and businesses.

Argentina’s real GDP growth and inflation: 2005-2011
% annual growth

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statisticsNote: (1) Data for 2011 refers to forecasts.

Inflation is a key political issue in Argentina, where many people remember the hyperinflation of the 1980s, which wiped out many people’s savings and led the economy into a prolonged economic slowdown.


If the unofficial inflation estimates are correct, expectations of high inflation will erode consumer purchasing power, undermining spending potential and reducing potential profits for businesses. In addition, public assumptions of higher than official inflation are driving broader price increases, exacerbating inflationary pressure:

  • Most pay rises, including all those in the public sector, are initially calculated on the basis of official inflation figures, although following worker protests most public and private pay rises were negotiated on the basis of the unofficial rate. For those companies negotiating according to the official rate, this means that consumers are effectively receiving pay cuts of around 15.0%. This will reduce annual disposable income by a similar amount. In 2010, annual disposable income was US$5,108 per capita similar to the regional average;
  • High spending on food is helping to drive up food prices, which are already suffering from global supply shortages. Food prices are estimated to have risen by around 40.0% year-on-year in 2010, with the resulting household costs serving to erode consumer disposable income. In 2010, consumer expenditure on food and non-alcoholic beverages accounted for the greatest proportion of total consumer expenditure at 20.2%, followed by housing with 15.2%;

Argentina’s consumer expenditure by type: 2010

% of total consumer expenditure

Source: Euromonitor International from national statistical offices/OECD/Eurostat/Euromonitor International.

  • The impact of higher inflation also affects savings, by reducing the incentive to save. In March 2011, the benchmark interest rate stood at 9.5%. With the unofficial inflation rate around 25.0%, the real interest on savings for consumers and businesses is negative. In 2010, Argentina’s savings ratio stood at 3.8% of disposable income;
  • The business environment is also deteriorating as a result of the discrepancy between the two inflation rates. In February 2011, the government fined a local consultancy US$125,000 under the Trade Loyalty Act, claiming that its data was misleading. Any further such cases could lead to concerns about the government’s readiness to intervene with private companies;
  • The difference between the official and unofficial inflation rates is undermining the business environment. Not only may companies struggle to negotiate pay rises bridging the difference between the two rates but official loans and investments will be calculated at the official rate, undermining financial gains for such companies;
  • Overall economic activity is being undermined, as the uncertainty over ‘actual’ inflation rate acts as a disincentive to invest or make long-term contractual commitments. The rising costs of running a business are also undermining profitability.


Argentina’s inflation is set to continue rising in 2011, with the government forecasting an inflation rate of 12.1% in 2011. However, private analysts continue to believe this is significantly underreported and assess that inflation will be closer to 30.0% during the year.

  • The ongoing inflationary spiral will curb Argentina’s economic growth, which is forecast to grow by 5.0% in real terms in 2011, down from 8.5% in 2010;
  • Ongoing food supply constraints such as export limits on grain in Russia and crop damage in Australia will keep global prices high, making food price inflation that major factor driving up inflation in 2011. Although Argentina has largely recovered from the drought of 2009, agricultural strikes in early 2011 may extend into the mid-year harvest season and disrupt supply;
  • The government is seeking to restore credibility to the inflation calculation methodology by working with the IMF to create a new index. Although no timeframe has been set, introducing a new index might help to restore public confidence in official figures, although oversight from the IMF would likely be necessary to provide reassurance from consumers and businesses.

Public concerns about the dual inflation rates have been shown through frequent demonstrations, particularly in Buenos Aires, and so the government is likely to press ahead with IMF talks ahead of presidential and legislative elections in October 2011. However, the government will also maintain social spending at current levels to retain its support during the election period, contributing to rising inflation in 2011.