Inflation in Argentina during the 2000s

ABSTRACT

The paper presents a neo-structuralist econometric analysis of the monthly inflation rates. The model breaks down the CPI into different components based on their price-formation mechanisms. The basic breakdown defines three components: PFLEX (fruits and vegetables, 3.6% of the basket), PREGUL (prices regulated by the government, 20.1% of the basket) and PFIX (the rest of goods and services, 76.3% of the basket). PFIX is the focus of the econometric analysis while PFLEX and PREGUL are considered exogenous. The explanatory variables are the monthly rates of: the price of bovine cattle at the domestic market, the international soy price, the price by ton of imported intermediate goods, the nominal exchange rate, the average wage of workers that are registered in Social Security and the productivity, measured by the GDP by employed worker. There was an informal indexation mechanism in the labor market. Average monthly wages rose at annual rates that were almost always higher than the sum of past annual inflation plus the annual increase in productivity. The over-indexation of the unit labor cost was the main inflationary factor in the period. The inertial component, represented in the model by the previous monthly rate, determines 60% of the current rate.

KEYWORDS:

• Argentina
• inflation
• macroeconomic policy

JEL CLASSIFICATIONS:

• E31
• O540

Notes

¹Frenkel, Julia (2003).

²This exposition is a short version of a longer paper that also includes a proof of the mid-2003 structural change, a description of the evolution of the mark-up between January 2002 and mid-2003 and an analysis of the inflationary impact of foreign exchange controls and the emergence of a parallel exchange rate between the first months of 2014 and December 2015. The complete version is available in Spanish at “La inflación en Argentina en los años 2000” (http://www.itf.org.ar/pdf/documentos/98_2016.pdf).

³Since January 2007 data published by INDEC was misstated to report inflation rates that were much lower than the ones that the economy was actually experiencing.

⁴The distinction between fix and flex prices follows Kalecki (1954), Hicks (1974) and Okun (1981).

⁵Prices comprised in PFLEX, PFIX and PREGUL are listed in the Appendix.

⁶An informal annual indexation of wages, prices and contracts took place during this period. The indexation was tied, since 2007, to the evolution of alternative CPI indexes (for example, the 9 Provinces CPI and indexes from private institutions).

⁷The derivation of the model is presented in (http://www.itf.org.ar/pdf/documentos/98_2016.pdf). Normal conditions are discussed in Frenkel, R. (1989).

⁸Frenkel, R. (1989). In Frenkel R. (1983) we implemented a similar econometric methodology to the study of manufacturing industry price dynamics.

⁹Foreign exchange controls were introduced at the end of 2011 and became increasingly restrictive over the years. In the complete version of this paper we show econometrically that the parallel exchange rate had significant effects on inflation since the beginning of 2014. For this reason, the estimation period of the main equation ends in January 2014.

¹⁰This breakdown differs from the one we have used in our model.

Additional information

Notes on contributors

Roberto Frenkel

Roberto Frenkel is Principal Research Associate at CEDES and Honorary Professor at Buenos Aires University.

Diego Friedheim

Diego Friedheim is Grantee of the Young Researchers Training Program at CEDES.