I usually remember with my friends a short time ago when we used to have lunch for just five pesos. Today we find this idea funny -that money is only enough for a coke!
Anyway, what surprises me is not that prices have risen so much, but that people seems not to give it much importance. Yes, we all realize that things are increasing all the time, that prices are rising. But who will deny that we have been growing a lot and that there are more people with jobs? After all, a little inflation is not so bad compared to the economic boom of the past 10 years, is it?
This is precisely what I want to discuss, the idea that the inflation we have been accumulating is not so bad compared to the high level of economic growth in the last 10 years.
The argument is undoubtedly cute, but let’s look at how much is a 20% inflation and how it relates to growth.
Is a 20% inflation too much or little?
Just saying little or too much implies comparing it with something, so let’s start with the rest of the world.
According to various sources like Infobae, CEPAL o even the CIA , Argentina is among the 5 countries with the highest inflation in the world (with an inflation rate above 20%, while the following ones are below 15%).
If we compare our inflation rates with other emerging economies which have also been growing significantly recent years -as is the case of BRIC countries- we can see that the only one which reaches double digits is India with 11%, followed by Russia with only 7 points. In the region we are just behind Venezuela, then there is a wide gap and Uruguay and Brazil follow with 7% and 6% respectively.
That is to say, compared to the world and major emerging economies and, even further, in relation to our neighboring countries, there is no doubt that our inflation rate is really high.
Let´s continue with the other side of the argument, a very interesting topic:
What is the relationship that exists, or not, between inflation and growth?
About this subject a lot has been written, especially since W. Phillips noticed, in 1958, that during the years 1861-1957 it was possible to observe an inverse relationship between inflation and unemployment. Thus, in the 50´s and 60´s it was thought that this was a permanent relationship, i.e. that higher inflation levels corresponded, unalterably, to low levels of unemployment (the idea was that higher levels of inflation brought increased economic activity, reason why there was lower unemployment). However, this relation broke down in the 70’s, when a new phenomenon that combines high inflation contexts with low levels of employment appeared (stagflation). A group of economists, among them M. Friedman, responded to the Phillips curve stating that in the long run inflation had nothing (or little) to do with the unemployment rate.
Thus, although in the short term inflation itself may have some effect on the real economy, in order to maintain unemployment low over time not only high levels of inflation are needed but these should be increasingly higher. In other words, to prevent a reduction in unemployment from being temporary, to prevent a reduction in unemployment form being temporary, a constantly growing inflation is needed; which is impossible due to both for economic and social reasons.
Returning to Argentina.**
Although there has been much discussion on these issues, today there is a considerable consensus that high inflation (a number greater than two digits) is not an effective tool to enhance economic activity. Indeed the major emerging economies, such as Brazil and China, began to worry about containing inflation when it was just starting to exceed 5% (for more information you can reed some articles by The Foodlinks or Americaeconomia).
The debate about until which point we should allow the price level increase in favor of growth is very interesting to me, but I do not consider that it corresponds with what is happening in Argentina.
A 20% inflation is a lot and there’s no doubt. All countries are concerned about inflation even when it does not reach 10%, we have duplicated it and it’s all good!
And it’s not only is a lot but it’s not enough to sustain the growth levels which are forecast. And what is worst of all, it is most unfair!
To finish I find very attractive the explanation that H. Hazlitt gives –in his book Economics in One Lesson– about how unfair it is to live with high inflation:
“Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs.”
Summarizing, if we agree that 20% inflation is too much, that it does not work as a tool to sustain growth and, what is worse, it brings completely unjust and inequitable consequences.
How come we have arrived here? Why do most Argentines not care about this issue?