More poverty and adjustment, the risks that economists see for stagflation – 08/12/2018



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As happened in the last three years, which preceded 2018, the Argentine economy entered the process known as stagflation, a technical term that applies to the fall of economic activity during two consecutive quarters (recession) allied to a process of high inflation.

The Economist Víctor Beker, director of the Center for the Study of New Economics (CENE) at the University of Belgrano, says that this combination is "the worst possible world", given that "annual retail inflation will exceed 45% and GDP will fall to minus 2.5 % "

Stagflation is a rare global phenomenon, economists say. Especially because the "normal" is that when the economy of a country contracts, inflation also decreases. In Argentina, it is the opposite.

"Price increases usually accompany the process of economic expansion, and in times of recession, prices stabilize or even fall, but in countries with high inflation, this may still persist with a sharp contraction in economic activity." explains Beker.

"There is an inflationary inertia that causes past inflation to determine future inflation. a restrictive monetary policyFirst, the quantities are adjusted by reducing production and employment, and only inflation falls significantly later. "

Beker admits anyway that the alternative explanation, to which the Central Bank adheres today, is that inflation persists in recessive periods. because the money supply continues to grow.

The Economist Gabriel Zelpo, from the Elypsis consultancy, lists a reason why stagflation lasts in an economy. "The country's external weakness with a strong depreciation of the exchange rate ". He adds: "The difficulty of stagflation is that it does not allow for an expansionary monetary policy to counteract the economic recession."

In the social damage of this economic process, Ramiro Castiñeira, of Econometric, lists "the constant and progressive deterioration of the quality of life and the advance of poverty, ranging from conjunctural to structural. "According to this analyst," Argentina has been practically stagflation since 2011, because growth was zero. The reactivation does not last more than a year and only allows the recovery of what was lost. "In addition, over the last eight years, the world has grown much more." "We still have the same amount of goods and services to distribute among the same people."

About when the economy can get out of stagflation, Zelpo says that the expectation is a modest recovery in activity for the coming year, as well as a slight slowdown in inflation. Something that will be noticed in relation to this year, but not so much in the month to month. "If your estimates are met, inflation will average 2% per month by the end of 2019.

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