Buenos Aires — Argentina’s “dollar blue”, the black market exchange rate for the Argentine peso against the US dollar, has continued to soar this Tuesday, following Libertarian Javier Milei’s surprise win in the country’s primary elections on Sunday. As the government reported that monthly inflation had ticked up to 6.3% in July, each dollar bill could buy ARS$730 on the streets of Buenos Aires.
That’s a 6.6% increase from the ARS$685 that each greenback was exchanged for on Monday afternoon.
As Argentines flock to illegal exchange house to preserve their purchasing power, with the US dollar as their perennial go-to refuge, analysts are concerned that inflation and currency depreciation will only worsen in the remainder of 2023.
Economy Minister Sergio Massa decided to devalue the peso by more than 20% on Monday, which has already triggered widespread markups across the country, particularly for goods dependent on imports.
The dollar blue’s new all-time high has come on the back of fresh capital controls from the government, which yesterday moved to place a $40.000 weekly limit for traders who buy stocks and bonds in pesos in order to sell them in US currency. This free-floating rate is known locally as the “dollar MEP”.
According to the National Securities Commission (CNV), the measure aims to reduce financial market volatility and its impact on the normal functioning of the economy.
Earlier on Monday, the Central Bank had announced its own measures: On one hand, it moved the official exchange rate by 22% to ARS$350 until the elections in October. On the other hand, it raised the monetary policy rate by 21 percentage points, bringing the Annual Nominal Rate (TNA) of Leliq to 118%.
Inflation Accelerates to 6.3% in July
The Indec statistics bureau reported inflation of 6.3% in July, bringing the accumulated price increase to 60.2% during 2023 and to 113.4% year-over-year.
Economic consultancies had projected an increase closer to 7.0% for the Consumer Price Index (CPI), although the official data fell below expectations. Economists anticipate a higher figure for August, an electoral month that has been riddled with foreign exchange measures.
In June, inflation had been recorded at 6%, marking a second consecutive deceleration.
The sectors with the greatest price hikes included Communications (12.2%), Recreation and Culture (11.2%) and Alcoholic Beverages and Tobacco (9.0%). The sharpest increases in food prices were Potatoes: 34.1% Onions: 19.7%, Sugar: 17.1%, Firm Yogurt: 16.7% and White Rice: 12.4%
What’s ahead for August?
During the first week of August, before the Economy Ministry’s official exchange rate adjustment, inflation had already shown sings of accelerating, according to private sector studies. Such price movements are only expected to intensify following the measures.
Emilio Prado, economist at the Foundation for Liberty and Progress, stated that “distrust in the local currency is growing, and uncertainty about the first electoral results has further accelerated the decline in demand for pesos.”
“It is expected that these events will translate into an increase in price hikes. Furthermore, the Central Bank is issuing much more money than what Argentines demand, significantly devaluing the peso,” he noted. “Thus far in August, we have an estimated accumulated inflation of 6.1%. However, looking at the behavior of the last 30 days, monthly inflation should rise to 7%,” he calculated.
“When there is inflation, prices of different goods do not all increase in the same proportion; some increase more than others,” analyzed Guillermo Fraile, academic director of the Small and Medium Business Management programs at IAE Business School.
He added that “financial information, even adjusted for inflation, does not reflect reality and therefore is not useful for decision-making purposes.” “The figures are not comparable because the structure of relative prices is distorted. This complicates investment,” he considered.
“If prices are constantly changing, they no longer fulfill their informational role: it becomes difficult to determine whether a supplier’s prices have become high in relation to those of its competitors. Furthermore, predicting the effects of a greater or lesser price increase on demand becomes complicated,” he emphasized.