The Government usually presents two arguments every time it is criticized for high inflation: the fall in demand for pesos by the public and the “recomposition of relative prices” still in process – that is, the increase in public service rates after years of delay. What, however, is not explained very clearly is how long it will take for these two negative factors to end, although there is a hint that you are close to the turning point.
Toto Caputo He limited himself to saying that the effect of massive dollarization – that is, the other side of the collapse in the demand for pesos– which occurred before last October’s election does not correct automatically for the good result that the ruling party obtained at the polls.
“The imbalance occurred due to a lower demand for pesos, and that must be rebuilt and it takes time. And now we are paying the consequences,” stated the Minister of Economy.
And regarding the recomposition of relative prices -which has now become worse, because the increases in electricity, gas and water the external shock is added of the rise in oil -, the explanation is the same: it takes time.
It was his own Javier Mileiwho, when asked by a social media user, gave his technical vision. He recognized that The change in relative prices is not the same as inflation -If he had stated otherwise, he would be contradicting his dogmatic position on inflation as a monetary phenomenon. But he made the clarification that, when there is surplus moneythe CPI jumps in the short term, due to the rise in prices that were behind.
“In the Argentine case, the excess supply of money is due to what was the inheritance of the stocks from the Kuka era, together with the delays of the Platita plan with price controls. Furthermore, if we add to this the fall in the demand for money during the 2025 electoral period, this boosted the surplus”wrote the president.
But he stated that, although price jumps will continue to be noted as long as “convergence to equilibrium inflation” lasts, there is no change in the long-term trend.
In short, there is still confidence in a fall in inflation, but first the cost of more price turbulence will have to be paid. But, above all, the unspoken message is that the government will continue to cling to its policy of “closing the peso tap”.
This generates in the market the expectation that next week, faced with a new debt maturity, Caputo will take the opportunity to once again absorb pesos that he considers “excessive” and that can put pressure on prices.. The precedent of the Treasury tender in the last week of March is eloquent: faced with a maturity of $8 billion, the minister was not content with “rolling up” the debt but also took a surplus of $3 billion, a figure almost four times higher than what he had absorbed in the previous tender.
In that way, Caputo neutralized the expansive effect which the Central Bank had done a few days before cut the lace requirement to the banks.
Does the demand for pesos have a floor?
It is a strategy not without controversy, given that this vacuuming of pesos occurs simultaneously with a rise in bank delinquency rates, a situation that banks attribute to the illiquidity of the market.
On the other hand, orthodox economists, including some as influential as Sunday Cavallo, They reproached the government for “the slowness” with which the BCRA buys dollars, and said that the fear that a larger purchase could generate inflation due to the injection of pesos was wrong. The argument is that there may be a short-term jump, but that the indicators would then stabilize.
Clearly, it is not what the government thinks: it was Milei himself who, before an audience of Wall Street investors, predicted that Santiago Bausili, president of the BCRA “dollars are going to come out of your ears,” but he immediately warned him “Be careful not to get caught up in the prices.”
And it is this situation that leads to one of the big questions of the moment: Has the drop in demand for pesos reached its bottom?or is there still room for worsening?
The truth is that the amount of money – whatever monetary aggregate is chosen to make the calculation – had a reduction in real terms during March. Thus, transactional M2 increased by just 1.4% nominally, while pure transactional money – it does not include savings accounts – fell by 1.5%.
On the one hand, this situation is not surprising, given the definition taken by Toto Caputo about the need to accommodate the money supply to public demand. The phrase that the minister pronounced before an audience of finance executives continues to resonate: “I can’t force people to have pesos in their pockets if they don’t want them.”
In this way, he implied that the contractive philosophy will continueeven though there are analysts who argue that this policy will aggravate the sectoral recession of the industry and that it will contribute to overvaluing the peso just when the rest of the regional currencies are devalued to regain competitiveness.
Waiting for help from the field
Starting in April there could be a change on the monetary level, since the “golden quarter” begins in which the large inflow of foreign currency occurs, as a result of the export of the coarse harvest.
According to the information of the Rosario Stock Exchangethere is already 25% of soybean production committed for sale, a figure that exceeds the average of recent years for this date.
And the combination of high harvest volumes and rising prices in the global market has caused the government to revise upwards its original projections: it now foresees that the field contributes US$40,000 million to total export.
In theory, a greater abundance of currencies in the market – and, therefore, greater strength of the BCRA regarding reserves -, it should bring confidence to the market and, therefore, increase the public’s demand for pesos.
However, not everyone believes that calm is assured. Among market experts there are those who point out that it is precisely at those times when there is a greater probability that the massive purchase of dollars by savers will rebound.
The temptation of buying dollars
From that point of view, what will happen in the second quarter is that the net supply of dollars in the market will increase as long as soybean producers decide to keep the pesos in their pockets. But given that the next campaign must be financed, and that inputs – such as fertilizers, derived from petroleum – are rising rapidly, it is likely that they want to recover their dollars, thus increasing again the demand for foreign currency.
Those who support this point give as an example the antecedents of the months of July and September of last year: the largest purchase of dollars on the part of the public coincided with the moments with the highest foreign exchange income from agriculture.
Furthermore, as market veterans tend to remember, the more “ironed” and the further away from the ceiling of the floating band the dollar is, the greater the perception of opportunity for buyers.
And, since bond rates in pesos are also being compressed, that feeling that it could be time to dollarize portfolios can be accentuated. As always, no one is clear when the click will occur, but the truth is that the level of dollar purchases registered in February – US$1,954 million in the banking system – is seen rather as the exception and not as “normal.” After all, It is less than half of the US$5.08 billion that had been demanded in September.
If Toto Caputo were right in the sense that that dollarization was more motivated by political fear that because of financial incentives, then your argument that there will be a recovery in the demand for pesos. But if, given the abundance of dollars, purchasing by savers who see the exchange rate as too cheap is reactivated, then there is a problem.
In short, this phenomenon of a fall in the desire to hold pesos a temporary problem will not be limited but longer range, With which the forecast of a rapid fall in inflation will come into question.
Does meat help?
There are, however, some factors that work in favor of the government, in the area of ”recomposition of relative prices”. Thus, while fuel prices rise, the sensitive food sectorone of the unexpected points that pushed the CPI up in the summer, is stepping on the brake.
The consulting firms that carry out their own surveys of the inflationary basket are recording increases by half of the previous months. In the case of Analyticsdid not register increases in the first week of April, bringing the average of the last four weeks gives 1.7%. For its part, the LCG consulting measured an average of 2.3% for March, with the detail of a reduction in the speed of increase in meat, one of the elements that had had the greatest impact on the CPI in recent months.
Analysts who follow the Cañuelas farm market indicate that towards the end of March there was a stabilization of prices, which since last spring have not stopped rising until they exceeded $5,000 per live kilo.
According to these analyses, there will be little carryover of meat increases for Aprilwhich supports the government’s hopes for a break in the upward trend in inflation by the time the CPI for the fourth month is published.
