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Inflation expectations for 2021 increased 20 points in one year

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The two main surveys of inflation expectations expect consumer prices to advance 49.8% in 2021. EFE / Juan Ignacio Roncoroni / Archive

Inflation expectations for 2021 that the Central Bank and the consulting firm FocusEconomics report each month rose 20 points in the last 12 months. The jump in the forecasts is based on the massive monetary issue that the Government had to resort to this year to cover the increase in the deficit caused by the fall in resources and the increase in expenses in the midst of the COVID-coronavirus pandemic. 19. Yesterday it was known that the consumer price index ended 2020 with an advance of 36.1%.

Consultants, banks, investment funds and other specialists forecast that this year will end with accumulated inflation of 49.8%, according to the results of the latest Market Expectations Survey (REM) of the Central Bank. The figure coincides with surprising accuracy with the consensus gathered in December by another survey, the LatinFocus Consensus Forecast, in which the median of expectations is also 49.8%.

In December 2019, the REM had forecast inflation of 30.1% for 2021, while the FocusEconomics survey estimated it at 29.7% for this year. Twelve months later, period in which Among other factors, it played neither more nor less than the black swan of a pandemic that plunged the planet into its worst economic crisis since World War II., the inflation forecasts for 2021 added as a consequence around 20 points.

At the end of 2019, the analysts consulted by the Central Bank were confident of a slowdown in inflation for 2021.
At the end of 2019, the analysts consulted by the Central Bank were confident of a slowdown in inflation for 2021.

Analysts at FocusEconomics attributed the jump in forecasts to, predictably, the monetary phenomenon: “Next year, inflation will probably be driven by a sustained expansion of the monetary base due to the monetary financing of the fiscal deficit.”

The analysis goes against the background of a more heterodox view held by the head of the BCRA, Miguel Pesce. On January 12, the entity concluded that it was “the result of a conflict over income distribution,” in a post published in Central de Ideas, the entity’s blog.

Inflation expectations, even those that, like the BCRA or FocusEconomics, consult dozens of specialists to obtain something close to consensus, are far from being accurate predictions.

Last December, analysts consulted by the Central made more gloomy projections for this year: they expect inflation 14 points above that of 2020. And 20 points higher than what they originally bet for 2021.
Last December, analysts consulted by the Central made more gloomy projections for this year: they expect inflation 14 points above that of 2020. And 20 points higher than what they originally bet for 2021.

Examples of differences between what is expected and what finally happens are unnecessary. For 2020, for example, the REM provided inflation forecasts of 42.2%, more than 6 points above what the Indec IPC finally set for the year. LatinFocus Consensus Forecast, for its part, was not more accurate: it forecast 41.8% for 2020.

Due to this difference between the expectation and the data finally registered, when Pesce took over the Central, a ranking of 10 consultants was developed that most hit their forecasts. That “TOP-10” expects inflation to close at 46% per year in 2021, that is, 4 points less than the global consensus of the 41 participants in the last survey.

The economy is at maximum monetization, because it was issued very strongly and it will continue to be necessary to issue because you do not have access to financial markets

Expectations, beyond not having predictive capacity – for example, no economist in December 2019 incorporated a pandemic into their analysis – if they have an influence on current behaviors. Any investment, financial or real, part of some future scenario impossible to specify but at least based on information available in the present to decide. In that sense, at least, confidence in the future of price dynamics does not seem to be important. In other words, confidence that inflation would drop this year has vanished.

“At the end of 2019 there was a demonetized economy and a process of fiscal adjustment through the hard times that the crisis had caused, limited emission needs, expectations of solving the financial front and decompressing the debt. In this context, after a 2019 of very high inflation, you expected less ”, he analyzed Gabriel Caamano by Consultora Ledesma.

The government did not want to make major corrections in the pandemic. The idea is that in 2021 they were going to have more back to iron rates, but that is now overdue and it will be difficult to contain (Rajnerman)

“Now the context is totally different. You decompressed debt, but you have an unsustainable gap, almost without reserves, the deficit increased due to the pandemic and the way you decided to face it. The economy is at maximum monetization, because it was issued very strongly and it will continue to be necessary to issue because you do not have access to financial markets, “he concluded.

Matias Rajnerman de Ecolatina, for its part, focused on corrections that would have saved inflation points and that were postponed by the pandemic.

“In between, a pandemic happened. A year ago we thought of a non-electoral 2020, a government with political capital and room to make corrections. He seemed committed to the fiscal balance and not to delay the dollar, “said the economist.

“But the Government did not want to make major corrections in the pandemic. The idea was that in 2021 they would have more back to iron rates, but that is now overdue and it will be difficult to contain, “he added.

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Ben Oakley
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