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Erasing Panorama of E & R: "The dollar will jump again and inflation will accelerate"

A recent report by Economía & Regiones warns that inflation in April is scattered by INdEC (3.4%) "Not for the Euphoria" and this – It will accelerate again in the future.

Inflation in April was 3.4%, -1.3 points. under the figure of March 19 (+ 4.7%) and -0.4 percentage points. below the average for the first three months of the year. "While inflation is lower, it is always good news, the result of March 19 is not to get euphoria", warns the report.

He explains that, on the one hand, inflation in April is what some countries in the region have in one year. In addition, the inflation that OECD countries have in two years. On the other hand, the April base inflation (3.8%) is exactly the same as the average base inflation for the first three months of 2019. April 2019, inflation corresponding to free market prices is the same as the average inflation recorded in the previous three months.

Inflation and Transfer to Prices (E & R)
Inflation and transfer to prices (E & R).

"Inflation is a permanent and permanent loss of purchasing power." Ergo is a monetary phenomenon because it is a monetary phenomenon, inflation is a macroeconomic phenomenon (…) it makes no sense to study the microeconomics of inflation in that month There is no point in exploring which the head grows a lot, which head increases more or less, or which a little in a given month all prices increase at the same pace, the same strength and rhythm ", warns the report. And he explains that this implies this "Perhaps prices that have so far increased (more or less) in relative terms are likely to increase less (more) in the future in relative terms."

Within this framework, the report states that "the analysis of inflation should focus on its future behavior"And this is related to the stability of the central bank's balance sheet and the quality of its monetary policy."And here are the problems, " She warns.

"When analyzing the balance sheet of the Central Bank and the quality of its monetary policy, it is more reasonable to conclude that in the short term, the monthly inflation can not decrease much and that the dollar will later rise over time and (later )) inflation will accelerate again in the future ", the report continues.

It is then said that linflation may continue to falllittle " a few months, but I will not go down "Serious". "It is virtually impossible for inflation to fall to 2.5% per month and to remain" there "from now on until the end of the year, which is necessary to keep inflation in 2019 below the inflation rate of 2018 . " ,

"On the contrary, inflation will be higher"According to the report, the issuance of LELIQs sets a very high level of expectations for issuance, depreciation and inflation, moving to another very high floor and difficult to overcome for the observed inflation. Indeed, between November 18 and February19 there was exchange rate stability, and monthly inflation averaged + 3.2%, and in December – 18%. Dand to reproduce such behavior by the end of the year, inflation 2019 will be higher than inflation 2018. In particular, if the average monthly inflation reaches +3, 2% by the end of the year, 2019 will close with inflation of + 49% (on an annual basis) and + 53% (average) + 1pp. and + 20p.p. over 2018; respectively.

In a few words,exchange rate stability is needed by the end of the year, so inflation 2019 is similar to inflation 2018 at the top, but + 20pp. higher average".

The economy and the regions explain why inflation can accelerate in the future. In this sense, he confirms this the chances are that the dollar will once again hit one or more leaps, and after each of those leaps, inflation will accelerate again, with inflation 2019 going higher than inflation in 2018.

"In this context, it is clear why the BACR and the government indicate all the weapons to artificially support the dollar"explains the report, but it clarifies this "The arrest of the exchange rate is with the sale of dollars and the dollars are not endless. The more dollars are lost to keep the dollar more stable, the stronger the next jump that will reduce inflation in the short term will be more than offset by a larger leap forward (first) of the dollar and (later) inflation later in time".

Within rational expectations (RATEX), LELIQ, which are not paid, are emission expectations, they are expected to devalue and inflation, which encourages declining demand for money. Over time and with all problems related to the BCRA, its monetary policy and the electoral cycle, lThe current decline in demand for money will deepen.

In this context of falling demand, explaining the work of E & R, economic agents will start moving to dollars and the exchange rate will go up sooner than later, to the exchange rate of $ 51.45, With which inflation will accelerate again. But that does not end here: "Monetary imbalances and exchange rate imbalances are likely to increase when the dollar is in the $ 51.45 group and BCRA sells reserves." As reserves continue to be sold, the exchange rate pressure will increase. Later, the BCRA will yield to exchange rate pressure and the exchange rate will inevitably rise to values ​​above the ceiling of the upper limit of $ 51.45, and the dollar will be much higher as a result of this new rise in the dollar, inflation again will accelerate".

In this context, he warns that inflation in 2019 will be higher than in 2018. And unless structural fund reforms are implemented, it is also expected that inflation 2020/2019 is also higher than inflation 2019/2018,

# CAC and monetary policy issues stimulate inflation?

"Inflation probably shrinks, and then comes later in the future"says the report, and says most of the reasons for this behavior are related to the Central Bank and its monetary policy, and there is a problem with the electoral cycle that will strengthen the decline in money demand by pushing (first) dollar and (later) the total price level.

"The BCRA has no reputation (…) has not fulfilled any of its promises, nor has it fulfilled any of its goals." The lack of reputation means that BCRA does not trust"he cautions, but he also asks"BACR policy is poorly developed, which increases the lack of trust and makes it inconsistent under dynamic conditions.

In this sense, the report mentions that BACR's current monetary policy "We do not take into account the recommendations of monetary theory that allow the elimination of inflation in almost all countries around the world. According to theory, disinflationary monetary policy has a chance to be successful if and only if it is based on rules. On the contrary, if it is discretionary, it is likely to fail and inflation will rise. "

But besides that "These rules need to be effective, simple, precise, transparent and reliable, attributes that BCRA's rules do not have."

"The BCRA's monetary policy rules ended completely meaninglessPermanent changes introduced in monetary policy have caused the BACR rules to become discretionary. So much so that in its last change of rules, BCRA has defined a zone of non-interference in which it can intervene discretionately, sell all its dollars without any scheme without the need to explain and without obligation to gives details.".

He also mentions this "BACR's monetary policy is poorly developed". He promises to sell more dollars at a lower price; with the new changes, currencies have come and gone less in the face of a similar mileage that encourages declining demand for money and reinforces the rejection of the peso.

Given that free reserves amount to approximately US $ 17,500 million, "We think it is very difficult for CACR to lose more than $ 10,000 million to maintain the exchange rate.,

"In this context, BCRA's monetary policy and its announcements on the new rule of intervention and the sale of reserves are dynamically inconsistent, i. sooner or later will be abandoned.", analyzes.

Finally, the report concludes this "Reserve policy is very difficult to hold until the election, that is, it is likely to be abandoned before the election, raising (first) the dollar and (then) inflation before the elections. In this scenario, it is understood that this moment and the coming weeks may be an oasis in the middle of the desert in terms of exchange and prices; on the contrary, at some point in the second half of the year we will begin to travel miles of desert sand over the dollar and the exchange rate".

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