Inflation Returns to Argentina

On April 5 Bloomberg reported that Argentina's annual inflation rate jumped to a 21-month high in March. Consumer prices are rising at an annual rate of 8.6% now -- above the government's target of between 5% - 8%. However, inflation has been rising very rapidly in the past few months -- 1.5% in January, 1% in February, and 1% in March. Inflation could top 12% this year if this trend continues.

The Public Is Not Concerned Yet

I made a few calls to associates & other business owners and people are not yet concerned. They tell me that only prices for basic products have increased. Prices for services are still holding steady. Additionally, wages have been effectively frozen since last year. Without increases in wages, inflation can only grow so fast.

Additionally, the people I spoke with are confident that the government's measures will prove effectively. Inflation does have a large psychological component and if people are convinced that the government's actions will bring inflation under control, they will not engage in behavior that will further aggravate the situation. I should also point out that somewhere around 40% of the population is currently below the poverty line, making rapidly-rising consumer spending unlikely.

Impact on Argentina's New Bonds

For all the bondholders reading this blog (yes, there are a few), you'll be happy to know that despite some of the comments you may have read here, the new dollar-denominated bonds are safe from this inflation. Let me first reprint the user's comment and then I'll address it:

Reader's Comment

They can indeed print pesos and then buy dollars to pay them off. This will have the same effect as with the peso bonds: high inflation and devaluation of the peso, since there will more pesos in the market and they will not be backed with gold or Central Bank dollars. The main advantage of the bonds being in dollars is that they are not subject to the peso devaluation, something very likely to happen if Argentina can’t pay them (people will not trust in the peso and will start buying dollars again, sending the peso straight to the bottom).

Straight Talk For Bondholders

The scenario the reader outlined here technically possible, but is still of no concern to bondholders who own the new dollar-denominated bonds. A devaluation of the peso, whether gradual through inflation or rapid through a crisis) will still have no effect on bonds denominated in dollars. You will be getting back interest and principal in US Dollars, so the value of the peso does not matter. You only have to worry about Argentina's ability to repay. The numbers you should be watching are government expenditures, GDP growth, and tax receipts. As long as the government is collecting enough money to pay the bonds and the economy is growing faster than increases in government spending, there is no problem.

Impact for Expatriates

If you're being paid a salary in pesos by your employer, now might be the time to negotiate with your employer for inflation-indexed increases. This is especially true if your HR department is located abroad in the US or Europe back at corporate headquarters. Corporate HR may not realize the situation you are facing as an expatriate.

You need to educate whoever is responsible for your salary that, as an expat, changing economic conditions is not be one of the risks that you signed-up for. You have enough to deal with learning a new language and fitting in to a new culture. Your salary and quality of life should not be left up to fate. You can refer your HR department to this Forbes Article or this Bloomberg Article.

If you're being paid in dollars or euros, this is probably not a concern for you. If hyper-inflation returns to Argentina the exchange rate should adjust in your favor, preserving your spending power.