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April 25, 2014
Monday, December 2, 2013

Axel and the axes

Even before ripples over the unexpected Repsol agreement had subsided, the new Economy Minister Axel Kicillof was at the centre of a fresh media stir towards the end of the week with a denial of inflation. Before entering any further into this issue, it should be explained that, given the agile eloquence of a minister being quoted by a press which often has an ax to grind, confusion is likely to be a recurrent situation.

But let us stick to the central issue of this editorial, which is inflation. Here Kicillof was not denying the existence of price increases but rather that they deserved to be defined as inflation since they were not across-the-board — transport fares and utility bills have been static for years, he pointed out. And here, far from trying to brush away a problem (an argument which would rapidly collapse as soon as the government begins dismantling an unsustainable subsidy mountain for transport and public services), Kicillof was hinting at a much deeper difficulty — the total disarray of relative prices, partly the result of those subsidies but also the yawning gap between the official and other exchange rates (a problem he has addressed in recent months by floating a multiple exchange rate without an irreversible commitment to that high-risk strategy) among other factors. Rather than relative prices as the root of most problems, many economists point to a money supply which has often expanded an annual 35-40 percent in the last decade as the prime cause of inflation but this relationship has seemed less linear in the world of the last five years or so — thus a United States awash in the liquidity of “quantitative easing” has often struggled to stay out of deflation (from which Japan has made a huge effort in this year to emerge). Certainly Kicillof rejects this connection.

Rather than media critics jumping on Kicillof as perpetuating an inflation denial already rejected at the polls, it would be much more useful if the level of debate could be raised on both sides.If Kicillof hints at relative prices as the key problem, he should start developing a strategy to put them back in sync (as well as explaining how he proposes to tame inflation with accelerating devaluation) while his critics should try more often to pin him down on what he is actually saying.

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