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High inflation to continue after new index

Economy Minister Axel Kicillof announces the new price index on Thursday.
By Fermín Koop
Herald Staff

Economists estimate peso devaluation will have an effect on February and March figures

After seven years of being criticized over the country’s data, the federal government unveiled its long-awaited new national urban consumer price index (IPCNu), which reported a 3.7 percent increase in prices in January compared to December. While some aspects of the index remain unknown, economists estimate high inflation will continue in the upcoming months as a consequence of the peso devaluation.

January’s index released on Thursday showed increases across multiple sectors of the economy, including health care (5.9 percent), transport (5.4 percent), home supplies (4.3 percent), food and drink (3.3 percent), housing (2.2 percent), and clothing, (0.8 percent). Similar or even higher figures will seen in February and March as the effects of the devaluation still haven’t ended, economists said.

“We’ll have to see what characteristics the index has in the next months but inflation will continue to be high. February and March figures will still be affected by January’s devaluation,” Soledad Pérez Duhalde, coordinator of macroeconomic analysis at Abeceb consultancy, told the Herald. “Inflation cannot be lowered without a credible price index.”

A large number was expected for January’s inflation considering the 66 percent increase in public transportation in the metropolitan area and increases in various goods such as fuels, electronics, food and domestic appliances after the steep peso devaluation in January. The 3.7 percent inflation is a jump in comparison with previous month’s figures when the old index used to report almost always a monthly inflation rate of less than one percent.

“We think the inflation problem will be harsh in the first three months of the year since only a part of the effects of the devaluation was seen in January’s figures,” Lorenzo Sigaut Gravina, chief economist of Ecolatina agency, told the Herald. “If the index continues on the right path, February and March figures will be high.”

The new index will be published monthly and will track prices on a basket of 520 goods and services, including food, drinks, clothing, housing, home appliances, healthcare, transportation, communication, recreation and education. It aims to cover 200,000 prices across the nation in six main regions: Patagonia, North East, North West, Cuyo, Metropolitan Area and Pampeana.

The main element of information to build the index was the 2012 national survey of household spending, which explains how and how much people spend nationwide. The old index was built on the 2004 version of the survey, which was considered outdated and because of that it was changed.

Even though the methodological changes, prices of goods surveyed were not included in the report as well as the basic and total food baskets, which are used to measure poverty and destitution and were usually published every month together with the IPC. More expensive baskets would have meant a raise of poverty and destitution figures, something that would have probably overshadowed the new index.

“The prices surveyed are still not published, which would give the index greater credibility,” said Abeceb agency in a report analyzing the new index. “There has been a reduction in the contemplation of Food and Drinks, Housing and Basic Services and Education goods while Leisure, Equipment and Home, Transport and Communications and Clothing had increased participation.”

According to the INDEC statistics bureau calendar, a complete report over poverty and destitution will be published in April but it will include only data of the second quarter of 2013. The first numbers of 2014 will see the light in September, giving INDEC more time to adapt to the new data reality.

A change of relationship

Having published a new national price index will probably boost the relationship of the federal government with the International Monetary Fund (IMF), which had its ups and downs in the last year years, and could help the government to close a deal with the Paris Club over the country’s debt with that group of creditor nations.

After the new index presentation, IMF spokesman Gerry Rice simply said “we take note” of it in a brief statement. “The IMF’s Executive Board asked for a new national price index in December 2013,” Rice said, specifying the organization will maintain its “calendar” for Argentina.

The IMF will probably discuss the new index at its next Board Members meeting in April, which could be followed in September by the decision to lift the “motion of censure” slapped on the country since February 2013 due to the lack of credibility of its inflation and economic growth data.

“A new index was what the IMF was asking for and it’s a big step to reach a deal with the Paris Club,” Pérez Duhalde said. “It was something necessary which now recognizes the country has high inflation.”

The new index was designed in consultation with the International Monetary Fund, which shamed the government last year by refusing to include its economic data in global reports, as well as with several countries such as Spain and Mexico and international organizations such as the World Bank and the International Labour Organization.

The government’s relationship with the Fund began to change after its board recognized the work done so far to change the price index. Last year, the IMF board praised “the work and attempt to introduce a new Consumer Price Index at the start of 2014,” as well as efforts to “alleviate deficiencies in GDP statistics.”

January price variations

Food and drinks: 3.3 percent
Clothes: 0.8 percent
Housing and basic services: 3.3 percent
House maintenance and equipment: 4.3 percent
Medical care and health expenses: 5.9 percent
Transport and communications: 5.4 percent
Amusement: 4.8 percent
Education: 1.6 percent
Other goods and services: 3.5 percent

@ferminkoop

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