In Argentina, Inflation Is Still a Monetary Phenomenon

Peronism is returning in Argentina. On December 10, Alberto Fernández assumed the presidency of Argentina. The office of vice president is now held by none other than Cristina Fernández de Kirchner, who served as president for two consecutive terms between 2007 and 2015. It was under her tenure that Argentina entered a period of stagflation (stagnation with inflation). 

After four years with Mauricio Macri at the helm and a failed implementation of inflation targeting, Argentina’s inflation rate is once again reaching its highest level since the hyperinflation of the late 1980s. If one takes Fernandez’s pronouncements seriously, the prospects of seeing disinflation in the short and medium terms are slim.

Milton Friedman famously said that “inflation is always and everywhere a monetary phenomenon.” One would imagine that, in a country with such a bad track record on inflation, Friedman’s pronouncement would go unquestioned. But that is not the case. On the contrary, Argentinian policy makers have become experts in developing alternative explanations — with heroic assumptions — for why inflation, at least in Argentina, is not a monetary problem. A rapid increase in the money supply, they maintain, will not produce inflation. And inflation, they say, might arise despite a stable money supply. 

Here are the two creative ways Argentinian policy makers, economists, and central bankers deny that inflation is a monetary phenomenon.

First, they confuse the price level with a change in the price level. Inflation is typically defined as a sustained change in the price level. But they claim inflation is explained by market power. That is odd. The presence of firms with monopoly power may explain why certain prices are high. It cannot explain why they have risen so fast. To take a typical example, large grocery store chains may have been able to charge a high price in recent years. But their large market share cannot explain how they have increased their prices by 25 percent per year, every year, since 2007.

Second, they ignore the well-known lags between changes in the money supply and their effects on the price level. It can take several months (and, in some cases, more than a year) for a monetary expansion to fully affect the price level. That a monetary expansion in December does not affect the price level that same year in no way implies that inflation is not a monetary phenomenon. Look at periods long enough to include the monetary policy lags and the relationship between changes in money supply and inflation is clear.

Argentina’s history of inflation should serve as a prophylactic against monetary cranks. But the return of Peronism (that is, populism) to Argentina is bringing alternative explanations of inflation back into the realm of reasonable policy discourse.  That’s a shame.

 If there is a lesson to be learned from the Argentinian experience, it is that one should never underestimate people’s willingness and capacity to rationalize alternative, but clearly wrong, explanations of well-known problems like inflation. We must be vigilant in defending good ideas, lest they be trumped by those that are popular and politically expedient.

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