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The Destructive Power of Inflation

CAMBRIDGE – When I was in Argentina last week, I was reminded of the devastating power of high inflation. Argentina’s annual inflation rate is now about 20%, down from an estimated rate of about 40% last year. The central bank is struggling to keep the economy on a disinflationary path, with a goal of achieving a 5% rate three years from now.

Inflation in Argentina has been much higher in the past. For the 15 years from 1975 to 1990, the annual rate averaged a remarkable 300%, meaning that the price level doubled every few months, on average. Prices rose at an explosive annual rate of more than 1,000% in 1989, before inflation was finally brought under control.

In fact, inflation was all but extinguished. I remember being in Argentina in the mid-1990s, when there was virtually no inflation. Back then, the Argentine peso was pegged to the US dollar, and both currencies were used equally for day-to-day transactions on the streets of Buenos Aires.

But the subsequent collapse of the peso’s dollar peg, and the forced conversion of dollar contracts into peso contracts at a non-market exchange rate, caused inflation to soar. By 2003, the annual rate had increased to 40%. It then fell to 10% for a few years. But it rose again during the presidencies of Néstor Kirchner and his wife and successor, Cristina Fernández de Kirchner, to 25%. It finally jumped back up to 40% in 2016, propelled by the removal of distortionary price subsidies that had previously been used to disguise the true inflation rate.