Argentina monthly inflation slows to lowest since last June

Argentina's monthly inflation rate slowed to the lowest level in 14 months in August, signaling a win for President Javier Milei. Consumer prices rose by 1.7 percent, aligning with the median estimate of economists surveyed by Bloomberg. In July, monthly inflation had increased to 2.1 percent from the previous month. Compared to a year ago, inflation had slowed slightly to 33.5 percent from 33.8 percent, which was lower than the 33.6 percent median estimate, according to data from the INDEC statistics agency.

Food and beverages drove the price increases, while housing and utilities experienced the most significant price hikes. Clothing and shoes saw a drop of 0.6 percent, likely due to end-of-winter sales. Recreation and culture costs remained flat after the winter holidays season concluded. A stable peso may have contributed to curbing prices, as the currency has depreciated only 12 percent in nominal terms over the past year.

Jimena Zúñiga, a Bloomberg Latin America geoeconomics analyst, noted that the moderate inflation print in August suggests that Argentine price pressures have eased somewhat, given the backdrop of soft growth and a stable peso. However, the modest decline also highlights strong inertia in the economy. Zúñiga warns that trying to further suppress inflation through exchange-rate stability would be a policy mistake, as it could lead to real appreciation and a negative impact on activity.

She expects greater policy pragmatism to emerge, which should allow inflation to remain moderately elevated and above consensus expectations.

Although the inflation slowdown is a positive development for Milei, economic activity has been faltering. Construction contracted by 4.5 percent year-on-year in July, while manufacturing fell nearly five percent. Energy, mining, and agriculture exports remain the primary drivers of growth, but they contribute little to boosting formal employment.

Economists have revised their growth forecasts for 2023 downward to 2.1 percent from 3.5 percent last December, a far cry from the five percent growth his government had budgeted for. Economists surveyed by the Central Bank also forecast a 30 percent year-end inflation rate for 2026, up from 20.1 percent last December.