Thursday
August 21, 2014

Higher inflation and pay demands from unions

Sunday, January 26, 2014

Weak peso brings risks to domestic economy

By Fermín Koop
Herald Staff
Concern arose this week among economists and businesspeople after devaluation broke new records, which led to several stores already increasing their prices or even not selling products. The official dollar closed on Friday at 8.017 after jumping 1.20 pesos this week due to a harsh devaluation, the highest since March 22, 2002.

Despite the possibility of the measure leading to a more competitive economy, devaluation implies several risks for the domestic economy, including a higher inflation rate, which could lead to higher pay demands from trade unions in the upcoming wage negotiations. Union leaders have already warned about the effect it might have, after having asked for a 35 percent wage hike.

Numerous stores decided this week not to sell their products or start charging higher prices due to the uncertainties over the upcoming dollar exchange rates, which will impact at the moment of buying new goods for their stores. Social media users shared photos of electronic shops where the prices of the products were taken away, while websites of well-known stores were shut down for “maintenance.”

A number of economists told the Herald that a co-ordinated plan should be implemented to fight inflation and called for complementary measures such as price agreements and additional transport subsidies in order to try to mitigate what could be the ill effects of devaluation.

“If there’s no plan to fight inflation, prices will soon increase. Up to 25 percent of the goods in the economy are imported and that leads to a quick impact on prices,” Esteban Domecq, economist and head of the Invecq firm, told the Herald.

“If the only plan is to devalue without other measures, inflation will reach 40 percent this year.”

Estanislao Malic, economist for the Centre of Financial Studies for the Development of Argentina (Cefidar), told the Herald the only ones who benefit from such a devaluation “are the financial sector,” adding that the measure is only “good for exporters and dollar-hoarders.”

“A devaluation has to be complemented with social policies such as price agreements and transport subsidies. It’s not enough with the current price agreement,” Malic said.

“‘If the government takes this kind of measures soon, it will be able to control the wage negotiations. Otherwise, they will be quite complex.”

After the wage increases authorized for police forces by several provinces, numerous unions have expressed a desire for a 35-percent wage increase this year. Unions had also called for wages to be negotiated every three or six months, a proposal rejected by the government since it could lead to a higher inflation.

“The government needs to devise a plan to fight inflation because, without one, prices will continue to go up,” economist José Luis Espert told the Herald.

Price agreement

So far the government’s main strategy to fight inflation has been price agreements. A new deal with supermarkets and suppliers was announced some weeks ago by Trade Secretary Augusto Costa and includes 194 brands, with 100 different types of products, including eight different kinds of beverages, meat, dairy produce, detergents, toiletries, vegetables and bread.

If Argentina reports 30 percent inflation this year, as private-sector economists expect, it would be the highest rate since the 2002 crisis, which was punctuated by a mammoth sovereign bond default and 41 percent inflation. Inflation totalled 10.9 percent last year according to the INDEC statistics bureau, while opposition politicians say the inflation was closer to 28 percent.

However, Economy Minister Axel Kicillof vehemently denied that devaluation could have an impact on prices, insisting that “it’s a lie from any point of view that this will be transferred to prices ... We hope people understand that there have been strong movements of economic destabilization to set prices which are not real.”

@ferminkoop

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