Cablegate: Argentina: Inflation Down As Economy Slows


DE RUEHBU #1685/01 3471248
R 121248Z DEC 08 ZDK



E.O. 12958: N/A
SUBJECT: Argentina: Inflation Down as Economy Slows

Ref:(A) Buenos Aires 656
(B) Buenos Aires 629, 532, 284, 159
(C) 07 Buenos Aires 2112

This cable contains sensitive information - not for internet


1. (SBU) In line with Argentina's economic slowdown, real monthly
consumer inflation rates have decelerated over the past five months
from the 25% range to an something near 20% in November 2008. Food
and beverage inflation, an important contributor to poverty
measures, is showing the largest declines. Official GoA inflation
measures have also been trending downward but, at an annualized 7.9%
as of November 2008, it remains less than half of independent
measures. The GoA has attempted to polish the tarnished credibility
of official statistics agency INDEC over the past year, including by
sending senior INDEC officials to Washington meet with their US
counterparts, hosting international conferences to review INDEC's
CPI methodology, and by hosting an INDEC open house for local
business community leaders. These efforts have foundered in the
face of credible suspicions that INDEC officials are selectively
cherry-picking or outright falsifying CPI price input data. Some
local analysts argue that current declining real inflation levels
now offer the GoA a face-saving opportunity to normalize its
official inflation by gradually raising official rates to bring them
in line with real market rates. However, there is no indication to
date that the GoA is moving to take this course of action. End

Variances in Official Vs. Real Arg Inflation

2. (SBU) The GoA's official Consumer Price Index (CPI), compiled by
government statistics agency INDEC, rose 0.3% in November, yielding
a 7.9% annual inflation rate for the prior 12 months period (down
from an 8.4% annual rate the prior month). Official INDEC monthly
rates have been trending downward from the 0.9% level in late 2007
to the 0.4% to 0.5% level over the past four months.

3. (SBU) It is widely believed that official INDEC CPI numbers have
been manipulated since January 2007 to understate politically
sensitive inflation and linked poverty measures (Ref A). As a
consequence, numerous independent organizations have been
reproducing INDEC's CPI methodology with their own CPI price
samples. Their results show domestic inflation considerably higher
than official rates: reputable Evaluadora Latinoamericana's (EL's)
preliminary inflation estimates for November 2008 is 0.6% (an
annualized prior 12-month rate of 20.3%), double the official INDEC
rate. Other independent analysts, including Prefinex, Estudio Bein,
De la Vega and Ecolatina, are estimating November inflation somewhat
higher in the 0.7% - 0.9% range). EL's breakdown of November
inflation highlights Medical and Health Care services as the CPI
component with the largest annual increase (30.4%), followed by
Education (up 29.0%). Food and Beverages, an important contributor
to poverty measures, is shown up an annual 22.1%. Other economists
place this Food and Beverage rate of increase at between 15% and

Economy Slows, Real Inflation Down

5. (SBU) Notwithstanding minor variance among independent Argentine
inflation estimates, all show inflation has decelerated over the
past five months. EL shows annualized CPI growth peaking at 22.7%
in August 2008, with all components except Housing trending downward
thereafter. Food and Beverages showed the sharpest decrease in the
rate of growth; Adelco and Camilo Tiscornia Associates, attribute
this to the sharp drop in global commodity prices.

6. (SBU) There is general consensus among Argentine economic
analysts that inflation is dropping not as a function of the GoA
implementing standard anti-inflationary macroeconomic policies (i.e.
maintaining positive real interest rates or equilibrium real
effective exchange rates) but rather because of a deteriorating
economic climate, including lower consumption and production
activity indicators and higher levels of unemployment. Analysts
caution, however, that anticipated further nominal depreciation of
the Argentine peso could sustain inflationary pressures. In a
December 11 meeting with the Ambassador, former Economy Minister and
2007 opposition presidential candidate Roberto Lavagna predicted
that 2008 real inflation would remain in the 20% range.

--------------------------------------------- ---
. . . Along with Inflation & Growth Expectations
--------------------------------------------- ---

7. (SBU) The decline in real inflation levels has also impacted
inflationary expectations: according to Di Tella University's
monthly reporting, 12-month inflationary expectations in both
September and October 2008 stood at 25%, down from an April through
August 2008 peak of 30%. Fundacion Mercado's December 3 report
shows that "positive expectations" that inflation rates will decline
more than doubled in November. Consulting and survey group
Poliarquia has just removed inflation as one of the most relevant
concerns for the general public. However, Poliarquia also show a 20
percentage point drop in their index of expectations on future
economic prospects, and growing concerns about employment.
Fundacion Mercado's show their index of general consumer economic
expectations dropped 2.6% and their employment expectation
expectations dropped 6% in November.

Failed Effort to Polish INDEC's Reputation

8. (SBU) The GoA's alleged manipulation of price data at INDEC began
in January 2007 when Secretary of Commerce Guillermo Moreno replaced
a number of INDEC technical experts with his own proteges. Later,
INDEC CPI methodological criteria were modified to restrict the
basket of CPI goods measured to include a higher proportion of GoA
price-controlled basic consumption items (Ref B). At the same time,
provinces including economically important Mendoza and Santa Fe
which maintain their own independent CPI statistical units, were
encouraged to synchronize their CPI methodologies with INDEC's.
These steps were highlighted in local media and interpreted by local
analysts as heavy-handed GoA efforts to politicize and control
statistical reporting. As a consequence, INDEC's reputation as a
credible and independent statistics unit has been seriously

9. (SBU) In an effort to enhance INDEC's reputation, INDEC's
politically appointed leadership has, over the past year, sent
senior INDEC officials to Washington meet with their US counterparts
(Ref C) and hosting international conferences with invited U.S.,
French and Spanish statistical experts to review INDEC's CPI
methodology. However, the consensus of local analysts has been that
the issue is not whether INDEC's CPI methodology is trustworthy per
se, but rather that there remain credible suspicions that INDEC
officials are selectively cherry-picking or outright falsifying CPI
price input data. Such price data manipulation, they argue, is what
has kept monthly official inflation reports between one third and
one half of independently calculated levels.

10. (SBU) On his assumption as new Chief of Cabinet in July 2008,
Sergio Massa publicly commented on the need to recover public
confidence in INDEC. In early October 2008, Massa invited
Argentine business leaders, including representatives of the
Argentine Industrial Union (UIA), the association of local banks
ADEBA, the Chamber of Commerce, the Chamber of Construction, and
individual entrepreneurs to an INDEC open house to discuss CPI
methodology. This was to have been the first of a series of public
meetings that would later include union leaders
(Major Argentine unions had established their own in-house cost of
living indices to justify sector-specific wage claims that tracked
real inflation levels.) However, the initiative faltered and no
follow-on meetings have been held to date.

--------------------------------------------- ---
Inflation Down - Chance to Regularize INDEC CPI?
--------------------------------------------- ---

11. (SBU) Some independent analysts have argued that declining real
inflation levels - albeit due to an economic slowdown - offer the
GoA a face-saving opportunity to normalize its official inflation
reporting. With "real" monthly inflation rates now closer to only
twice average officially reported levels (versus nearly three times
their levels from mid-2007 to mid-2008), these analysts see the
economic slowdown as a chance for INDEC to gradually raise its
official rates in order to bring them inline with real market rates.
Recent official INDEC monthly CPI releases, however, offer no
indication that the GoA is moving to take this course of action.

12. (SBU) A slowing economy has achieved what GoA heterodox economic
policy could not - a decline in real inflation levels and,
importantly for upcoming wage negotiations, inflationary
expectations. The good news is that polls now indicate that
inflation is no longer one of the top concerns of the Argentine
man-on-the-street. The bad news is that there is no indication that
the GoA plans to take this opportunity to regularize its official
inflation reporting and polish INDEC's tarnished image.


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