4th January 2023
Policy Brief
Inflation in Argentina: A Persistent Problem
Looters in the outskirts of Buenos Aires, forced to steal after persistent price increases, 19th December 2001
Photo taken by Daniel Luna
South America is no stranger to inflation; however, Argentina, its 2nd largest economy, seems
powerless to prevent its most recent bout.1 This paper will discuss the causes of Argentina’s inflation,
current government measures, potential solutions and will conclude with policy suggestions.
Introduction
Argentina was once the richest country in the world; 2 however, it has suffered from bouts of
inflation as can be seen in figure 1. In its most recent spell inflation has reached 92.4% as of
November 2022 and is still expected to rise.3
1
Figure 1: Argentina Historical Inflation Rate
Inflation Rate
1000,00%
100,00%
10,00%
1,00%
0,10%
1980
1985
1990
1995
2000
2005
2010
2015
2020
Source: Instituto National de Estadistica y Sensos República Argentina, accessed January 3,
2023, https://www.indec.gob.ar/indec/web/Institucional-Indec-LastestIndicators
High inflation first appeared in Argentina in 1950 when wage growth began to increase
prices. Since then, it has undergone many cycles of inflation and relative stability.4 inflation is rooted
in Argentina by poor fiscal responsibility. The Argentine government has historically increased the
money supply to fund its persistent fiscal deficit.5 After a period of inflation the government will
typically implement monetary reforms. These often include implementing controls on the government
budget and on the extent to which the central bank can expand the money supply.
Argentina’s economy has always been primarily focused on agricultural exports. It has
focused on cereals, grains and meat products. Brazil and The United States of America typically are
its largest trade partners.6 This has often meant that economic conditions in Brazil and The United
States of America have a large impact on the Argentine economy.7
2
Causes of Current Crisis
The primary cause of inflation in Argentina is the high fiscal deficit that is financed by
increasing the money supply. Other prominent causes are the indexation of contracts and payments
and the removal of inflation distorting subsidies.8 9
The government has run a budget deficit for more than a decade this can be seen in figure 2
The government has paid for this spending by expanding the money supply. The drastic increase in
money supply can be seen in figure 3.
Figure 2: Argentina Government Budget
4
government surplus as a percentage of GDP
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
Source: Banco Central de la República Argentina, accessed January 4, 2023,
https://www.bcra.gob.ar/PublicacionesEstadisticas/balances_anuales.asp
3
Figure 3: Argentina Money Supply M2
M2 in Billions of Argentinian Pesos
2500
2000
1500
1000
500
0
2016-11-26
2013-08-14
2010-05-02
2007-01-18
2003-10-06
2000-06-23
1997-03-11
Source: Federal Reserve Bank of St. Louis, accessed January 4, 2023,
https://fred.stlouisfed.org/series/MYAGM2ARM189N
M2 is a measure of the supply of money in an economy. It is the total of all cash, money in
both checking and savings accounts and other short-term savings vehicles.
The Argentinian Government primarily spends money on transfer payments which make up
50.6% of the government budget. These are mainly in the form of welfare payments and social
security payments. The government also spends a large proportion of the budget (15.6%) on subsidies.
These are largely on energy and transport. The government spends a relatively large proportion of its
budget on servicing its debts (8.3%) A breakdown of the budget can be seen in figure 4.
4
Source: Oficina Nacional de Presupuesto, accessed January 4, 2023,
https://www.economia.gob.ar/onp/presupuestos/2022
The large spending on subsidies have been reduced since 2016.10 This reduction in 2016 was
a proximate cause of this most recent increase in inflation. Subsidies reduces the price of goods for
consumers. Reducing the subsidies caused the price of goods to rise, increasing inflation. However,
by funding these subsidies the inflation rate increases as the subsidies were funded by increasing the
money supply.11
Another cause of inflation in Argentina is the indexation of payments and contracts.12
Indexation is when clauses are inserted into agreements where the costs or wages are tied to a variable
such as inflation. This is a mechanism to reduce the effects of inflation in day-to-day life. However,
this contributes to the inertia of inflation, since costs and wages can be linked to previous inflation
figures. So even if the underlying causes of inflation are reduced inflation will continue. This is an
issue since 77% of households are in at least one payment plan, as of 2019.13 These payment plans as
well as many employment contracts are indexed against inflation.14
5
Current Government Policies
The main policy that the government is implementing to reduce inflation is to raise interest
rates, currently at 75%. This can be seen in figure 5. This, in theory, means that there are greater
rewards for saving so consumers will save instead of consuming. This should decrease the inflation
rate in the economy. This has not been successful as citizens typically spend as soon as they receive
their money as they anticipate inflation to quickly erode the value of their earnings.15
Figure 5: Argentina Interest Rate
85,0%
75,0%
65,0%
55,0%
45,0%
35,0%
Source: Banco Central de la República Argentina, accessed January 4, 2023,
https://www.bcra.gob.ar/PublicacionesEstadisticas/Principales_variables_datos.asp?serie=793
5&detalle=Tasa%20de%20Pol%EDtica%20Monetaria%20(en%20%%20n.a.)
The government also receives IMF conditional loans worth $44 Billion. This will allow
Argentina the ability to fund spending without having to increase the money supply. The loans are
conditional on Argentina reducing its fiscal deficit and controlling its monetary policy.16 This forces
the government to be fiscally responsible. The loan comes after Argentina received loans worth $50
Billion in 2018.17 This is proving to be moderately successful as seen in the following quote from the
most recent IMF review.
6
The Executive Board assessed that all quantitative performance criteria through
end-September 2022 were met, on the back of prudent macroeconomic
management by the new economic team. 18
Potential policies
Starting in 1989 Argentina managed to tame its inflation. It did this by banning indexing and
implementing a currency board. This means that for each peso issued one dollar or equivalent quantity
of gold must be in the central bank. This pegged the peso to the dollar and prevented the government
from fiscal spending funded by increasing the monetary supply. This decreased the deficit from 7.6%
in 1989 to 2.3% in 1990. These policies worked and decreased inflation from 2313.96% in 1990 to
4.18% in 1994. However, this system failed during the 1995 and 2002 crises. The restrictions on the
central banks spending prevented the bank from acting as a lender of last resort and prevented the
government from using monetary expansion as a means of financing expansionary fiscal policy.19
Another potential course of action would be to dollarize Argentina. This is somewhat popular
in the country; having been suggested to congress in March 2022.20 This may be easy to implement
given the partial de-facto dollarization of the country at present.21 Dollarisation eliminates the
possibility of using monetary policy as a tool. This policy was implemented by Ecuador and El
Salvador in the past. It successfully reduced inflation and currency instability in those countries. Both
problems that plague Argentina. However, dollarisation leaves a country prone to shocks as monetary
policy cannot be used. It also leaves the country exposed to counter-cyclical monetary policy from the
The United States of America. These are problems that were faced by El Salvador. Another issue is
the almost permanent nature of dollarization, with no countries having been able to reverse the
process.22
Brazil’s polices in the 1990’s provide another course of action. Brazil created a new currency
the Real Unit of Value, now known as the Real. The currency was linked to the dollar. Both the Real
and the out-going currency were allowed to co-exist. New contracts had to be priced in the Real;
however, old contracts and prices could be in either currency. Due to the relative price stability of the
Real, it was successfully adopted. This meant that price rises were more controlled and hence
7
reducing inflation. Indexing became redundant as the price of the Real was stable. This eliminated
widespread indexing without the need of heavy-handed policies. This policy was supported with fiscal
austerity, mainly in the form of tax rises. After the transition and low inflation was achieved, the
currency was allowed to float. Brazil was able to regain its monetary policy autonomy.23
Policy Recommendations

The continuation of IMF loans are paramount as they provide a source of finance for public
spending that doesn’t expand inflation. It also provides a reason for the government to
continue its current trajectory of fiscal responsibility.

The adoption of a new currency, the Argentine equivalent of the Real Unit of Value, would
allow the government to reset the expectation of inflation in the economy. This should be
implemented in a similar manner to the Brazilian Real.

The reduction in subsidies particularly fuel subsidies would allow the fiscal deficit to fall and
can contribute to fiscal austerity. Fuel and energy subsidies distort the Argentine economy
and lead to the over-consumption of fossil fuels. On top of this fuel subsidies are known to be
regressive; therefore, reducing fuel subsides will reduce inequality.24
8
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9
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4,339,638,514,218,963,616,223,516,918,748,618,624,522,622,156,626,628,228,924,2
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4,698,.
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Endnotes
“World Economic Outlook Database,” IMF, accessed January 2, 2023,
https://www.imf.org/en/Publications/WEO/weo-database/2022/October/weoreport?c=512,914,612,171,614,311,213,911,314,193,122,912,313,419,513,316,913,124,339,6
38,514,218,963,616,223,516,918,748,618,624,522,622,156,626,628,228,924,233,632,636,63
4,238,662,960,423,935,128,611,321,243,248,469,253,642,643,939,734,644,819,172,132,646,
648,915,134,652,174,328,258,656,654,336,263,268,532,944,176,534,536,429,433,178,436,1
1
10
36,343,158,439,916,664,826,542,967,443,917,544,941,446,666,668,672,946,137,546,674,67
6,548,556,678,181,867,682,684,273,868,921,948,943,686,688,518,728,836,558,138,196,278,
692,694,962,142,449,564,565,283,853,288,293,566,964,182,359,453,968,922,714,862,135,7
16,456,722,942,718,724,576,936,961,813,726,199,733,184,524,361,362,364,732,366,144,14
6,463,528,923,738,578,537,742,866,369,744,186,925,869,746,926,466,112,111,298,927,846,
299,582,487,474,754,698,.
Marcelo Duclós, “In 1895 Argentina Had the World’s Highest GDP Per Capita: What Went
Wrong?,” Libertad Y Progreso, April 16, 2018, accessed January 2, 2023,
https://www.libertadyprogreso.org/en/2018/04/15/in-1895-argentina-had-the-worlds-highestgdp-per-capita-what-went-wrong/.
2
Patrick Gillespie, “Argentina Inflation Spikes to 92% as Economic Growth Picks Up,”
Yahoo News, December 15, 2022, accessed January 2, 2023,
https://news.yahoo.com/argentina-inflation-spikes-92-economic-193650844.html.
3
“Commanding Heights : Argentina,” PBS, accessed January 3, 2023,
https://www.pbs.org/wgbh/commandingheights/lo/countries/ar/ar_full.html.
4
“Case of the Day: Money and Inflation in Argentina,” Reed College, accessed January 3,
2023, https://www.reed.edu/economics/parker/f10/201/cases/Argentina.html.
5
OEC, “Argentina (ARG) Exports, Imports, and Trade Partners | OEC,” OEC - the
Observatory of Economic Complexity, January 3, 2023, accessed January 3, 2023,
https://oec.world/en/profile/country/arg/.
6
7
“Commanding Heights : Argentina.”
8
“Case of the Day: Money and Inflation in Argentina,”
Martin Feldstein, “Argentina and Inflation: What the Rest of the World Can Learn,” World
Economic Forum, February 6, 2020, accessed January 4, 2023,
https://www.weforum.org/agenda/2017/01/argentina-and-inflation-what-the-rest-of-theworld-can-learn.
9
Adan Martinez, “ARGENTINA: A Consumer Subsidy Trap,” UC Berkley: Center for
Latin American Studies, season-03 2018, accessed January 4, 2023,
https://clas.berkeley.edu/argentina-consumer-subsidy-trap.
10
11
Martinez, “ARGENTINA: A Consumer Subsidy Trap.”
12
“Case of the Day: Money and Inflation in Argentina,”
Lindsay Lehr, “Installments: The Key to Consumers’ Pockets in Latin America,” Latin
American Business Stories, September 9, 2020, accessed January 4, 2023,
https://labsnews.com/en/articles/payments/installments-the-key-to-consumers-pockets-inlatin-america/.
13
14
“Case of the Day: Money and Inflation in Argentina,”
11
David Feliba, “Worried about Inflation? In Argentina, It’s a Way of Life.,” Washington
Post, January 27, 2022, accessed January 4, 2023,
https://www.washingtonpost.com/world/2022/01/27/argentina-inflation-strategy-tactics/.
15
Maria Candia, “IMF Executive Board Approves 30-Month US$44 Billion Extended
Arrangement for Argentina and Concludes 2022 Article IV Consultation,” IMF, March 25,
2022, accessed January 4, 2023, https://www.imf.org/en/News/Articles/2022/03/25/pr2289argentina-imf-exec-board-approves-extended-arrangement-concludes-2022-article-ivconsultation.
16
“IMF Executive Board Approves US$50 Billion Stand-By Arrangement for Argentina,”
IMF, June 20, 2018, accessed January 4, 2023,
https://www.imf.org/en/News/Articles/2018/06/20/pr18245-argentina-imf-executive-boardapproves-us50-billion-stand-by-arrangement.
17
Maria Candia, “IMF Executive Board Completes Third Review of the Extended
Arrangement Under the Extended Fund Facility for Argentina,” IMF, December 22, 2022,
accessed January 4, 2023, https://www.imf.org/en/News/Articles/2022/12/22/pr22459-imfcompletes-third-review-of-the-extended-arrangement-under-the-eff-for-argentina.
18
19
“Case of the Day: Money and Inflation in Argentina,”
Otaviano Canuto and Sebastian Carranza, “Dollarization of Argentina: Revival of a
Zombie Idea,” Policy Centre for the New South 33, no. 22 (April 28, 2022),
https://www.policycenter.ma/publications/dollarization-argentina-revival-zombie-idea.
20
Natalie Alcoba, “The US Dollar Is Sewn into Argentina’s Economy and Its Culture,” Al
Jazeera, September 13, 2019, accessed January 4, 2023,
https://www.aljazeera.com/economy/2019/9/13/the-us-dollar-is-sewn-into-argentinaseconomy-and-its-culture.
21
22
Canuto and Carranza, “Dollarization of Argentina: Revival of a Zombie Idea.”
João Ricardo Mendes Gonçalves Costa Filho, “Tackling High Inflation in Argentina, the
Brazilian Way,” OpenDemocracy, July 13, 2017, accessed January 4, 2023,
https://www.opendemocracy.net/en/democraciaabierta/tackling-high-inflation-in-argentinabra/.
23
David Coady, Valentina Flamini, and Louis Sears, “The Unequal Benefits of Fuel
Subsidies Revisited: Evidence for Developing Countries,” IMF Working Papers 15, no. 250
(November 25, 2015): 1, https://doi.org/10.5089/9781513501390.001.
24
12