Argentina Moves to Stop Inflation Spiral
Groping to halt a devastating surge in inflation just ahead of the presidential election, Argentina’s government Tuesday tightened price controls and tried to fend off demands for huge pay raises.
The Argentine currency, the austral, plunged 17% against the dollar during the day, closing at 64.5 australs to the dollar, compared to 17 australs in early February. Interest rates rose to 40% per month.
The plunge of the austral was a serious blow to President Raul Alfonsin’s attempt this month to restore confidence by appointing a new economic team and ordering policy changes. The measures were all but ignored by major companies and small savers alike, who rushed to buy dollars as a hedge against further uncertainty and price rises.
The new economics minister, Juan Carlos Pugliese, scrapped the country’s three-tier exchange rate last Friday in favor of a free-floating rate, hoping his action would encourage exporters to cash in their dollars for australs and calm down the markets. Business leaders long had sought that change, but when it occurred, there was little response.
Major food chains Tuesday were reported to have augmented their security forces to guard against possible unrest.
The government trade secretariat announced that price increases, which companies previously could impose automatically in line with monthly utility-rate rises, now must be approved by trade authorities. Companies may raise prices this month only if they prove that their costs went up, and the government will have 15 days to rule on each request, allowing authorities to stall for time.
The new price rules apply to companies with sales of more than 360 million australs annually ($5.5 million), which set the tone for the nation’s prices. The rules allow price increases just once a month.
Prices for some food and household products have more than doubled in recent weeks as Argentina’s heavily “dollarized” economy responded to the surge in the dollar’s value and the withering of the austral’s. Those with a few australs saved up have quickly formed long lines to change their australs into dollars, and exporters delayed selling their dollars, despite more favorable exchange policies imposed last week.
The Central Labor Confederation, meanwhile, rejected the government’s proposal for a 25% pay raise for the month of April alone, demanding 37.5% and threatening work stoppages. The government has sought to hold down raises as well as prices to brake the inflationary spiral.
Officially, inflation this month is expected to be about 25%, after falling as low as 7% late last year. But frantic shoppers, rushing to spend their money before it depreciates, have no doubt that many products on market shelves have soared far higher.
The government dispatched 150 inspectors onto the streets during the day to monitor price rises, and a public broadcasting campaign urged the public to report “speculators.” But few believed that the price controls could be enforced.
The collapse of the austral and the inflationary spurt were gloomy developments for Eduardo Cesar Angeloz, the candidate of Alfonsin’s ruling party, the Radical Civic Union. Polls already have given a strong lead to opposition Peronist candidate Carlos Saul Menem in the May 14 election, principally because of public anger over the economic crisis.
“There is an explosive situation in the country,” said Peronist legislator Luis Corzo, a Menem confidant. “We are at the door of hyper-inflation, and the government has not been able to find a solution. . . . Some workers’ salaries have fallen to the equivalent of $35 a month.”
Angeloz has increasingly differed with Alfonsin, calling for drastic measures to reactivate the private sector and spur exports.