Argentina inflation falls below 2% for first time in 5 years

The inflation rate in Argentina eased to 1.5% in May, the first time in five years that monthly price increases have been lower than 2%. The National Statistics Agency reported the drop and adds credence to the argument by President Javier Milei that his radical economic reforms are stabilizing the economy.

This figure contrasts with the 2.8% in April and the 25.5% increase recorded in December 2023, when Milei assumed office. The monthly inflation rate has dropped to a political shot in the arm as midterm elections near in October, but the annual rate remains at a high of 43.5%.

Milei has focused his economic policy on deregulation, fiscal consolidation, and eliminating market interventions that have existed for decades. The government abandoned the peso crawling peg system in April as part of a 20 billion dollar deal with the International Monetary Fund (IMF) and permitted the currency to float between 1,000 to 1,400 to the U.S. dollar. 

“When there’s a fiscal surplus, and the printing press slows down, inflation plummets. It’s natural for this to happen. The fundamental laws of economics dictate this.”

~ Milei’s spokesman Manuel Adorni.

Markets have taken it with caution. The government also came up with a temporary tax exemption on agricultural exporters, which assisted in bringing in more U.S. dollars to prop up the peso.

Economic measures aim to restore reserve buffers

IMF projects the Argentinian economy to recover by 5.5% in 2025, though current signs show that the economy is not growing. Productivity is slow, and consumer demand is too feeble to influence spending in important areas.

The inflation has eased, but now lower activity poses a risk of undermining popular support. Argentina needs to increase its foreign reserves to handle its financial needs. The country is to meet an additional $4.4 billion by July under the IMF, a delay of a previous June deadline. 

Milei has ruled out the method employed by previous administrations of acquiring U.S. dollars by printing pesos, saying that the expansion of the monetary base should be restricted. Rather, the government has tried other mechanisms, including a repurchase agreement with foreign banks for $2 billion and a bond issue to foreigners to the tune of $1 billion.

The central bank has recently announced that it would allow the market to set interest rates, abandoning the traditional benchmark rate system in a move that is consistent with the Milei Phase 3 economic program. Previously, the monetary authority had set the rate at 29%, but it now targets monetary aggregates to decelerate the expansion of the money stock.

The central bank said, “This reorganization consolidates a more conventional monetary aggregates control framework, eliminating the notion of a ‘monetary policy interest rate’ typical of schemes such as inflation targeting.”

This was in addition to the new dollar repo auction that the central bank undertook on June 11 after conducting a similar exercise in December. These instruments are aimed at strengthening reserves without fueling domestic monetary growth. The reforms of Milei constitute the most economic turn in Argentina in decades.

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