Argentina’s inflation deception — Alberto Cavallo

MIT Sloan Asst. Prof. Alberto Cavallo

For years Argentina has lied to the world about its inflation rate. INDEC, the official statistics institute, claims the country’s inflation rate stands at around 10%. But estimates by economists—myself included—show that figure is two to three times less than the real rate. According to MIT’s Billion Prices Project, which runs an index that aggregates online price information from the largest supermarkets all over the world and provides real-time inflation estimates, Argentina’s inflation rate is currently about 25%.

This vast discrepancy between reality and what the government claims has been observed since 2007. At that time the government began putting pressure on INDEC, traditionally an independent body, to change its statistical methodologies. It eventually fired workers responsible for creating the price index, and replaced them with employees who had close ties to the government. Since then the official inflation rate has been surprisingly stable—hovering around10%.

But INDEC isn’t fooling anyone. A survey conducted by Di Tella University in Buenos Aires has consistently shown since 2008 that annual inflation expectations among consumers are between 25% and 30%. Provincial governments and other independent economists have published alternative price indices that double or triple the official inflation rate. Even the government has implicitly recognized that the inflation rate is much higher than officially reported. In both 2011 and 2012 the minimum wage was increased by approximately 25%, consistent with the inflation estimates from the index of the Billion Prices Project at MIT.

There is no clear reason why the government continues to manipulate the official price indexes. Some economists point to lower interest payments for inflation-linked bonds, while others claim that, by using artificially low inflation estimates in the budget, the government can avoid distributing any excess tax income to the provinces. I think this was simply a desparate attempt by the government to hide the negative consequences of its policies. After all, high inflation doesn’t fit with the story that the government likes to convey about the state of the economy.

In any case, the government is not backing down. Quite the contrary.

Independent economists are continually threatened with fines or jail time if they publish their own estimates. Most of them have been forced to comply. Provincial governments, which depend greatly on tax resources sent by the federal government, are also under increasing pressure. Seven provinces have recently announced that they are no longer going to publish their own estimates.

Meanwhile, Argentina is plagued by uncertainty and volatility. As bank deposits fell in 2011, the government strengthened capital controls and severely limited the foreign exchange market. In February 2013, it imposed a temporary price freeze on products sold in major supermarkets until April 1. Similar measures have failed in the past, creating shortages and only temporarily delaying some price adjustments. Indeed, the online data shows that between 2007 and 2012, items under price controls had a similar inflation rate as the rest of the goods in the economy.

Sooner or later, the government will have to face the truth about inflation.  It will take a long time for INDEC to regain the credibility and trust of Argentinians and the international community, but this is the only way to start addressing the country’s inflationary problem. 

* Online and Official Price Indexes: Measuring Argentina’s Inflation, by Alberto Cavallo Massachusetts Institute of Technology; Journal of Monetary Economics

 Alberto Cavallo is the Cecil and Ida Green Career Development Assistant Professor of  Applied Economics at the MIT Sloan School of Management. 

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