Argentina Central Bank Sees Monthly Inflation Going Over 10%

(Bloomberg) -- Argentina’s central bank expects monthly inflation in August to have accelerated to almost double the pace of July after the government devalued the peso, two officials said in another sign the economy is quickly deteriorating.

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The central bank estimates consumer prices will increase at least 10.6% from July, the fastest monthly rate since Argentina was coming out of hyperinflation more than three decades ago, the officials said, asking not to be named citing preliminary internal high frequency data and private online researchers like PriceStats. Beef, fresh produce and medicine prices are seen as the biggest contributors to the acceleration, according to one of the people.

The August data, to be released by the country’s statistics agency on Sept. 14, would dwarf the 6.3% monthly inflation that Argentina posted in July, confirming the significant impact on prices from an 18% peso devaluation announced by the government earlier in August.

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Still, the projection by the BCRA, as Argentina’s central bank is known, stands below forecasts by private economists. Buenos Aires-based consultancy firms EcoLatina, EcoGo and Consultora Ledesma estimate the monthly inflation to be between 10.8% and 13%.

“We’re seeing a very elevated pass-through because this devaluation occurred in the context of high uncertainty, little government credibility and very few reserves,” Santiago Manoukian, research chief at EcoLatina, said.

A central bank spokesperson said the bank does not calculate its own inflation index nor confirm private estimates.

Devaluation Aftermath

The administration of President Alberto Fernandez devalued the peso’s official exchange rate on Aug. 14 after suffering a bruising defeat in the country’s primary election. The measure, agreed with the International Monetary Fund as part of a troubled $44 billion loan program, was designed to help cash-strapped Argentina rebuild reserves by bringing the artificially stronger rate closer to those seen in the parallel market.

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The central bank boosted its key interest rate by 21 percentage points to 118% following the devaluation. As part of the IMF agreement, Argentina has also agreed to maintain the key rate above inflation “to continue to support demand for peso assets,” according to an IMF statement by managing director Kristalina Georgieva.

In the four years leading up to the primary, Fernandez tightened capital restrictions strongly to cope with dwindling dollar reserves in an attempt to prevent a devaluation that would accelerate inflation and be unpopular with voters. Yet the strategy ended up creating a system of multiple exchange rates and ultimately didn’t avoid the sharp decline in the value of the peso.

In parallel markets on Tuesday, the Argentine currency dropped to a record-low 800 pesos per dollar, compared to the 350 pesos per dollar of the official rate. Economy Minister Sergio Massa on Sunday announced measures to boost public employee wages, pension payments and other subsidies to compensate for the impact of the devaluation but at the risk of accelerating inflation expectations further.

The country will vote in a general election on Oct. 22.

Read More: Argentina’s Economy Plummets Ahead of Elections

(Update with market impact from ninth paragraph.)

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