Milei Keeps the Peso From Driving Huge Price Hikes in Argentina

Article content

The bond market in turn is pricing in a decline in implied inflation over the coming months, from current levels near 30% to about 19% in 2026, according to local brokerage Max Capital.

Article content

What Bloomberg Economics Says…

Article content

“We expect Argentine inflation accelerated to a 2.4% monthly pace in October as market jitters and uncertainty stirred formerly dormant pass-through at the margin. Additionally, volatile seasonal prices have been running below core inflation and are due for an uptick.”

Article content

— Jimena Zúñiga, Argentina economist

Article content

For the full analysis, click here

Article content

That would mark a big change for entrepreneurs like Ana Paz, who runs a supermarket chain north of Buenos Aires. Paz still recalls the jitters from sudden peso devaluations in the past, for example in August 2023, when annual inflation shot up to 124%. Suppliers, Paz said, at the time preferred to sit on their goods rather than sell. “I preferred to buy everything before everything went to hell,” she said. “Retailers would even raise prices more than necessary — preemptively, so they wouldn’t be left behind.”

Article content

After Milei’s party suffered a landslide defeat in provincial elections in Buenos Aires in September, some boutique wineries raised prices by 2.5% to 5% almost immediately. “But most of the market, including big brands like Arcor and Coca-Cola, didn’t move,” Paz said. “The adjustment is much slower now.”

Article content

Article content

The peso came under heavy pressure in the months before October’s midterm elections, with Argentine officials and even the US Treasury selling dollars to defend it. The tension rattled markets and put Milei on the back foot ahead of the vote. The currency settled after the president’s surprisingly strong showing in the vote, but remains weaker compared to the highs hit earlier this year. 

Article content

Argentina recorded a $8.7 billion current account deficit in the first half of the year, according to official data, which many analysts see as a problem. But, the real exchange rate versus a basket of other currencies has depreciated 35% since April, according to One618. 

Article content

Improved investor confidence after the elections sparked a wave of private debt sales that could boost dollar inflows into the local foreign exchange market. Those inflows — together with dollars from energy exports — could support the peso.

Article content

“Pass-through is contained” because investors view the present exchange rate as sufficient to keep the current account stable, “so it doesn’t need to move,” according to Juan Manuel Pazos, chief economist at One618. “In previous devaluations, retailers overshot price increases to get ahead of future moves and not be left behind,” he said. 

Article content

Milei, who built his campaign around the promise to defeat inflation, now faces the consequences of the currency’s depreciation, which caused markets to gyrate and put his performance in the midterm elections at risk. So far, the data suggests the blow will be softer than in past decades, buying him valuable time. But if the peso comes under renewed attack, the fragile equilibrium could unravel quickly and lead entrepreneurs like Jara and Paz to hike prices again.

Article content

“Shock Therapy” is a weekly analysis column focused on finance and markets in Argentina.

Article content