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Cablegate: Argentine Official Inflation: Allegations Of

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0159/01 0431403
ZNR UUUUU ZZH
R 121403Z FEB 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0222
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000159

SIPDIS

SIPDIS
SENSITIVE

HR/OE FOR SALLY CINTRON
WHA/EX FOR JIM ROBERTSON, BILL HALEY

E.O. 12958: N/A
TAGS: ECON EFIN EINV AMGT AFSN APER AR
SUBJECT: Argentine Official Inflation: Allegations of
Continued GoA Manipulation and IMF Request for
"Clarification"

Ref: (A) Buenos Aires 117

(B) 07 Buenos Aires 2371
(C) 07 Buenos Aires 2271

This cable contains sensitive information - not for internet
distribution.

-------
Summary
-------

1. (SBU) The GoA is reporting "official" January 2008 inflation at
0.9%, well below independent measures of monthly inflation in the 2%
range. The international financial press is calling this lowball
release a blow to expectations that the Cristina Fernandez de
Kirchner (CFK) administration would gradually implement more
accurate inflation reporting and work to resolve the controversy
over the management of GoA's national statistics agency INDEC.
Separately, an INDEC spokesman confirmed that the IMF has asked for
"clarification" of INDEC's new inflation calculation methodology,
and local media reports that a January 15 letter from the IMF warned
Argentina's macroeconomic data may be excluded from its World
Economic Outlook if those data fail to meet UN standards.
End Summary.

--------------------------------------------- --------
January "Official" Inflation Said Grossly Understated
--------------------------------------------- --------

2. (SBU) According to GoA National Statistics Bureau INDEC, consumer
price inflation (CPI) in January 2008 was 0.9% month-on-month (MoM),
well below consensus market expectations of an "official" rate
announcement in the 1.2-1.5% and private measures of "true" January
inflation the 2% range. The January release left 12-month inflation
at 8.2%, the lowest level in two years.

3. (U) Details of INDEC's January CPI data show that the increase in
the sub-index tracking the prices of transportation and
communication, up 1.9% MoM, was the main driver of January
inflation, contributing 0.28% to the headline figure. The increase
in this index reflects a roughly 11% hike in the cost of public
transportation due to bus, train and subway fare hikes, which
weights 6.4% in the CPI basket. Meanwhile, according to INDEC,
January food inflation was 0.7% MoM, (7.3% YoY) accounting for 0.24
percentage points in the headline figure. Independent local
economists charge that this official food inflation significantly
underestimates "true" January food inflation estimated in the
3.0-3.5% MoM range. Finally, independent economists argue that
INDEC's January data includes distortions in seasonal patterns which
appear aimed at minimizing headline inflation. Similar distortions
have been highlighted by independent economists since January 2007,
with seasonal increases in official prices often coming out below
values observed in previous years.

--------------------------------------------- ------
IMF Requests Clarification of INDEC CPI Methodology
--------------------------------------------- ------

4. (SBU) An INDEC spokesman confirmed February 7 that the IMF has
asked for "clarification" of the new methodology used by INDEC to
calculate inflation. According to local media reports (confirmed to
EconCouns by the IMF's resident#6rd on February 7 comments
in Washington by IMF spokesman Masood Ahmed that "reliable data on
key indicators, like inflation, are key to establishing a sound
political economy, not just in Argentina but in all nations."

------------------------------------------
True 2007 Argentine Inflation in 20% Range
------------------------------------------

5. (SBU) On January 28, INDEC had declared "official" 2007 inflation
in the greater Buenos Aires area at 8.5%, private economists' CPI
inflation estimates are broadly in the 20% range (Ref A). Dissident
staff of INDEC, citing what they term bald-faced GoA manipulation of
statistics, announced January 29 that they calculate true 2007
inflation in the Buenos Aires metropolitan area was higher still, in
the 22-26% range. The dissident INDEC staff also noted that 2007
food inflation was in the 36-39% range, compared to official food
inflation of only 8.6%.

--------------------------------------------- ----------
2008 Inflation, Wage Increases Expected in 18-20% Range
--------------------------------------------- ----------

6. (SBU) In January reports, JPMorgan and other independent local
economists projected prices to surge another 18-20% in 2008. A Di
Tella University survey on inflationary expectations shows that the
local population expects inflation to reach 22.6% in 2008; their
perception of inflation during 2007 was 33%. Inflation during 2008
will be seriously affected by wage increases to be negotiated during
the first quarter. The magnitude of such an increase will be a key
factor particularly for inflation expectations. Interestingly,
INDEC recently announced that the salary index increased 22.2%
year-on-year in November, roughly in line with independently
calculated true inflation levels. While salaries in the formal
private labor market rose 20.1% (y-o-y), wages in the informal
private labor market increased 22.3% y-o-y and public workers'
salaries jumped almost 28% y-o-y,according to INDEC.

-------------------------
Comment: A Slippery Slope
-------------------------

7. (SBU) INDEC's inflation figures have come under fire since its
director was replaced a year ago, with dissident INDEC employees
claiming that data have been systematically manipulated to arrive at
an official 2007 inflation rate of 8.5%, less than half the rate
calculated by private analysts. The international financial press
is calling INDEC's lowball official January inflation release a
significant blow to expectations that the CFK administration would
gradually resolve the controversy over the management of INDEC and
implement more accurate inflation reporting. (Prices of GoA
inflation-linked bonds fell sharply as a consequence, with the yield
on Argentina's benchmark 25 year inflation-linked bond up 26 basis
points to 8.3%, the biggest change since November 2007).

8. (SBU) The tarnished credibility of INDEC's CPI inflation
statistics has already called into question the reliability of
linked GDP growth data (which independent observers argue is likely
overstated by a low GDP deflator) as well as poverty and indigence
statistics. Should the IMF decide to exclude Argentine inflation
from its World Economic Outlook, the credibility of a broader range
of GoA macroeconomic data could be called into question.

WAYNE

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