With 92 per cent inflation in its consumer price index, South American Argentina is currently near the top of the inflation rankings. Apart from Venezuela, which is struggling with very specific problems, this makes it an absolute frontrunner in terms of inflation rates, not only globally but also with comparator countries in Latin America. A long-term comparison shows that Argentina’s inflation rates have been galloping away for decades, regardless of the global crisis of rising costs of living. The other major economies of the continent, Brazil and Mexico, also had to struggle with uncontrollable inflation rates for a long time – Mexico had annual inflation rates of over one hundred percent until the end of the 1980s and Brazil even fell victim to a hyperinflation of several thousand percent; it was only from the later 1990s that they were able to push these rates back down to double-digit levels and finally, from the 2000s onwards, below ten or even five percent. However, these values came at a costly price: Brazil’s economy collapsed massively as a result of the interest rate hikes; as recently as the 1970s, the country had annual GDP growth rates of over ten percent in some cases, but these eventually collapsed to as low as minus four percent. The same pattern, albeit less drastic, befell Mexico when it pegged its peso to the US dollar in order to regain credibility with its population.
Figure 1: Inflation rates of selected Latin American countries (in %)
Argentina pursued similar plans in the 1990s when, under the pressure of inflation, it submitted to the economic policy ideas of the Washington Consensus set by the World Bank and the Inter-national Monetary Fund. But this cocktail of economic and social reforms created new problems, mainly in the financial sector. The Latin American countries were hit by a financial crisis almost simultaneously at the turn of the millennium. While Mexico survived its tequila crisis through a US aid package and its membership in the NAFTA free trade area, Brazil managed to win Argentine export shares as well as production capacities and investments of Argentine companies due to an early devaluation of its currency, the real, thus mitigating the effects of the financial crisis on its real economy. Argentina was the last to bite the bullet and slid into national bankruptcy in 2001. The subsequent collapse of the economy by almost 20 percent also led to a massive deterioration of the economic situation of Argentine citizens. Since then, the country has not been able to get its inflation under control, regardless of the political orientation of their governments. This is particularly remarkable given that Argentina was one of the richest countries in the world in the first years of the 20th century, on a par with Germany and France.
With inflation averaging 72.4 percent in 2022 compared to 2021, Argentina’s currency is reacting much more strongly to the problems of the global economy than the Latin American average of 14.1 percent. Moreover, in contrast to most other countries, inflation is not expected to fall very much in 2023. The comparison is even clearer with Mexico and Brazil, which, as major economic powers, are far below the South American average.
Figure 2: Inflation rates of different categories in Argentina
As in the rest of the world, food prices are the driving force behind inflation in South America, as illustrated by a comparison of different product categories in Brazil and Argentina, although both nations are major food producers in the form of soybeans as well as flour and oil products from them. In both Brazil and Argentina, clothing and footwear is the category with the highest inflation rates (although due to different classifications, the values are only comparable to a limited extent – unlike, for example, the Harmonised Index of Consumer Prices across all European countries).
While household goods are becoming more expensive in both countries, the housing category, which includes electricity and energy, has actually fallen in Brazil. This is partly due to fatal differences in the energy supply of both countries. Brazil covers two-thirds of its needs from hydropower, biomass, solar and wind – only a tiny fraction comes from fossil fuels. A special feature of the country is that the overwhelming majority of Brazilian cars can run on both petrol and biodiesel, which in Brazil is largely produced from sugar cane. Argentina’s primary energy mix is quite different: 40 per cent comes from gas, which is partly produced by the country itself but also has to be imported to a large extent. In addition, there are oil imports and only a tiny proportion from renewable energy sources.
Figure 4: Inflation rates of different categories in Brazil
Even all things being equal, Argentina’s inflation would therefore be higher than Brazil’s, but the loss of control over its own currency and thus price signals also leads to much higher swings in Argentina’s growth rates overall: Negative growth was followed by very strong growth rates, but hardly even growth. Investment continued to lag and on average over the years Argentina’s economic growth lagged behind all comparable countries.
Figure 5: GDP growth rates of selected South American countries