Argentina: Inflation Down as Economy Slows

UNCLAS BUENOS AIRES 001685 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV AR SUBJECT: Argentina: Inflation Down as Economy Slows Ref:(A) Buenos Aires 656 (B) Buenos Aires 629, 532, 284, 159 (C) 07 Buenos Aires 2112 This cable contains sensitive information - not for internet distribution. -------------- SUMMARY -------------- ¶1. (SBU) In line with Argentina's economic slowdown, real monthly consumer inflation rates have decelerated over the past five months from the 25% range to an something near 20% in November 2008. Food and beverage inflation, an important contributor to poverty measures, is showing the largest declines. Official GoA inflation measures have also been trending downward but, at an annualized 7.9% as of November 2008, it remains less than half of independent measures. The GoA has attempted to polish the tarnished credibility of official statistics agency INDEC over the past year, including by sending senior INDEC officials to Washington meet with their US counterparts, hosting international conferences to review INDEC's CPI methodology, and by hosting an INDEC open house for local business community leaders. These efforts have foundered in the face of credible suspicions that INDEC officials are selectively cherry-picking or outright falsifying CPI price input data. Some local analysts argue that current declining real inflation levels now offer the GoA a face-saving opportunity to normalize its official inflation by gradually raising official rates to bring them in line with real market rates. However, there is no indication to date that the GoA is moving to take this course of action. End Summary -------------- Variances in Official Vs. Real Arg Inflation -------------- ¶2. (SBU) The GoA's official Consumer Price Index (CPI),compiled by government statistics agency INDEC, rose 0.3% in November, yielding a 7.9% annual inflation rate for the prior 12 months period (down from an 8.4% annual rate the prior month). Official INDEC monthly rates have been trending downward from the 0.9% level in late 2007 to the 0.4% to 0.5% level over the past four months. ¶3. (SBU) It is widely believed that official INDEC CPI numbers have been manipulated since January 2007 to understate politically sensitive inflation and linked poverty measures (Ref A). As a consequence, numerous independent organizations have been reproducing INDEC's CPI methodology with their own CPI price samples. Their results show domestic inflation considerably higher than official rates: reputable Evaluadora Latinoamericana's (EL's) preliminary inflation estimates for November 2008 is 0.6% (an annualized prior 12-month rate of 20.3%),double the official INDEC rate. Other independent analysts, including Prefinex, Estudio Bein, De la Vega and Ecolatina, are estimating November inflation somewhat higher in the 0.7% - 0.9% range). EL's breakdown of November inflation highlights Medical and Health Care services as the CPI component with the largest annual increase (30.4%),followed by Education (up 29.0%). Food and Beverages, an important contributor to poverty measures, is shown up an annual 22.1%. Other economists place this Food and Beverage rate of increase at between 15% and 20%. -------------- Economy Slows, Real Inflation Down -------------- ¶5. (SBU) Notwithstanding minor variance among independent Argentine inflation estimates, all show inflation has decelerated over the past five months. EL shows annualized CPI growth peaking at 22.7% in August 2008, with all components except Housing trending downward thereafter. Food and Beverages showed the sharpest decrease in the rate of growth; Adelco and Camilo Tiscornia Associates, attribute this to the sharp drop in global commodity prices. ¶6. (SBU) There is general consensus among Argentine economic analysts that inflation is dropping not as a function of the GoA implementing standard anti-inflationary macroeconomic policies (i.e. maintaining positive real interest rates or equilibrium real effective exchange rates) but rather because of a deteriorating economic climate, including lower consumption and production activity indicators and higher levels of unemployment. Analysts caution, however, that anticipated further nominal depreciation of the Argentine peso could sustain inflationary pressures. In a December 11 meeting with the Ambassador, former Economy Minister and 2007 opposition presidential candidate Roberto Lavagna predicted that 2008 real inflation would remain in the 20% range. -------------- --- . . . Along with Inflation & Growth Expectations -------------- --- ¶7. (SBU) The decline in real inflation levels has also impacted inflationary expectations: according to Di Tella University's monthly reporting, 12-month inflationary expectations in both September and October 2008 stood at 25%, down from an April through August 2008 peak of 30%. Fundacion Mercado's December 3 report shows that "positive expectations" that inflation rates will decline more than doubled in November. Consulting and survey group Poliarquia has just removed inflation as one of the most relevant concerns for the general public. However, Poliarquia also show a 20 percentage point drop in their index of expectations on future economic prospects, and growing concerns about employment. Fundacion Mercado's show their index of general consumer economic expectations dropped 2.6% and their employment expectation expectations dropped 6% in November. -------------- Failed Effort to Polish INDEC's Reputation -------------- ¶8. (SBU) The GoA's alleged manipulation of price data at INDEC began in January 2007 when Secretary of Commerce Guillermo Moreno replaced a number of INDEC technical experts with his own proteges. Later, INDEC CPI methodological criteria were modified to restrict the basket of CPI goods measured to include a higher proportion of GoA price-controlled basic consumption items (Ref B). At the same time, provinces including economically important Mendoza and Santa Fe which maintain their own independent CPI statistical units, were encouraged to synchronize their CPI methodologies with INDEC's. These steps were highlighted in local media and interpreted by local analysts as heavy-handed GoA efforts to politicize and control statistical reporting. As a consequence, INDEC's reputation as a credible and independent statistics unit has been seriously tarnished. ¶9. (SBU) In an effort to enhance INDEC's reputation, INDEC's politically appointed leadership has, over the past year, sent senior INDEC officials to Washington meet with their US counterparts (Ref C) and hosting international conferences with invited U.S., French and Spanish statistical experts to review INDEC's CPI methodology. However, the consensus of local analysts has been that the issue is not whether INDEC's CPI methodology is trustworthy per se, but rather that there remain credible suspicions that INDEC officials are selectively cherry-picking or outright falsifying CPI price input data. Such price data manipulation, they argue, is what has kept monthly official inflation reports between one third and one half of independently calculated levels. ¶10. (SBU) On his assumption as new Chief of Cabinet in July 2008, Sergio Massa publicly commented on the need to recover public confidence in INDEC. In early October 2008, Massa invited Argentine business leaders, including representatives of the Argentine Industrial Union (UIA),the association of local banks ADEBA, the Chamber of Commerce, the Chamber of Construction, and individual entrepreneurs to an INDEC open house to discuss CPI methodology. This was to have been the first of a series of public meetings that would later include union leaders (Major Argentine unions had established their own in-house cost of living indices to justify sector-specific wage claims that tracked real inflation levels.) However, the initiative faltered and no follow-on meetings have been held to date. -------------- --- Inflation Down - Chance to Regularize INDEC CPI? -------------- --- ¶11. (SBU) Some independent analysts have argued that declining real inflation levels - albeit due to an economic slowdown - offer the GoA a face-saving opportunity to normalize its official inflation reporting. With "real" monthly inflation rates now closer to only twice average officially reported levels (versus nearly three times their levels from mid-2007 to mid-2008),these analysts see the economic slowdown as a chance for INDEC to gradually raise its official rates in order to bring them inline with real market rates. Recent official INDEC monthly CPI releases, however, offer no indication that the GoA is moving to take this course of action. -------------- Comment -------------- ¶12. (SBU) A slowing economy has achieved what GoA heterodox economic policy could not - a decline in real inflation levels and, importantly for upcoming wage negotiations, inflationary expectations. The good news is that polls now indicate that inflation is no longer one of the top concerns of the Argentine man-on-the-street. The bad news is that there is no indication that the GoA plans to take this opportunity to regularize its official inflation reporting and polish INDEC's tarnished image. Wayne