Price Controls Mean Living The Dream In Argentina

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The government in Argentina is rather pleased that supermarket price controls are helping pull down inflation and has decided to keep them in place for another three months.

The price setting is stopping shopkeepers put up the costs of many of the items that are included in the country’s calculation for inflation.

The result is, on face value, inflation is falling. The government is quoting a rate of 18%, but international analysts would easily agree the true rate is double the one announced.

The problem is now the economy is in even more of a mess than before.

No one is really sure whether government cost controls or the falling cost of energy, or more than likely, both, are influencing the headline inflation rates in Argentina.

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Nightmare for businesses

The short term publicity gain for the government is probably far more damaging for the economy as prices of supermarket goods are a good signpost of how the nation’s farmers and manufacturers are performing.

These prices generally bob up and down according to supply and demand, but with price controls, gauging demand is impossible to know the real price of anything. Manufacturers could face ruin because the artificially set price for their goods is set below break-even or the real price of making them, while others could be reaping profits beyond their dreams because their set price is pegged way too high.

The scenario is a nightmare for business. Prices are falling in line with inflation, but the sale price is pegged, so companies cannot cut them to be competitive if demand is low nor increase them to make more money if demand is high.

Bigger economic headaches are on the way – in three months or so, the government will scrap price controls and the markets will rebalance, probably sending inflation back to around the 40% mark again.

Stellar inflation

Meanwhile, 40% inflation looks quite reasonable from Venezuela.

Expats at the Bank of America have forecast the headline rate in Caracas could reach 200% before the end of the year.

The reason? Venezuela’s government have operated a strict regime of price controls that have virtually seen every industry except oil production and agriculture shut up shop.

The lesson for Argentina is price controls did not work in Venezuela. They ruined the economy and will likely result in stellar inflation when the rest of the world is settling into rates between -1% and 2%.

The government has not published scheduled economic indicators, probably because the figures are too awful to admit.

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