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Surge Of Inflation Will Quickly Erode FX Devaluation

ARGENTINA
  • The 25.5%m/m jump in consumer prices in December was below the +30% consensus, but still marked the highest print since March 1990. Annual inflation surged to 211.4%, from 160.9% previously, as compared to 222% expected. A jump in food prices drove much of the increase, following the expiration of price freezing programs, but core inflation also rose sharply after the large FX devaluation in December.
  • Following the more than 50% devaluation, the peso has been restricted to a managed depreciation of 2% per month. Given the huge inflation differential this is leading to a rapid appreciation of the real effective exchange rate, which JP Morgan estimate will erase the official FX devaluation by early Q224. This could increase pressure for further FX adjustments ahead.
  • Going forward, inflation dynamics will remain challenging, with Goldman Sachs expecting sequential inflation to remain in double digits in the coming months partly due to further passthrough from the devaluation and the reset of additional regulated prices. Further ahead, however, they believe that a swift fiscal adjustment and drag from real economic activity should contain price pressures.
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