The government will be unable to reduce inflation or accumulate foreign reserves
The rate of inflation persists above 6% per month, and the government has no effective tools to bring it down. In the past, the tools used to fight inflation were, alternatively, the exchange rate, freezing utility prices, containing nominal wage rises, and increasing interest rates (or quantitative monetary control set by the Central Bank). None of those tools are currently available. Only a reduction in the rate of expansion of public spending remains as a possible disinflation tool.
Immediately after his appointment, Minister Sergio Massa announced that he would work hard to reduce the rate of growth of public spending. After three months in office, he has not been able to fulfill this commitment. There are several signals that the same will happen for the remainder of 2022 and throughout 2023.
Since Massa does not have any other macroeconomic tool available to reduce the monthly inflation rate, inflation will not fall below 6% per month (equivalent to 100% per year) for the rest of Alberto Fernández's presidential term, as we had forecast previously. Massa will also face increasing difficulties in avoiding a foreign reserve crisis and will face constraints in issuing public debt in the small domestic capital market. These challenges may end up causing exchange rate volatility similar to that of July 2022, sometime during 2023.
Furthermore, the level of economic activity will not be able to continue growing as it has through August 2022. The data for September and October will most likely begin to show signs of stagnation that may turn into recession in early 2023.
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