A tale on high inflation

Inflation February 4.7%. It is high, but it is worth remembering where it comes from.

High (higher!) monthly inflation started at the beginning of 2018 and reached +6pp.

It only receded due to covid lockdowns and the 10pp recession in 2021. But that was of course temporary. We never got out of that new economic regime/functioning.

From May 2021, monthly inflation has been paired with economic reopening & recovery. Margins up now that there is demand, prices up as business reopen, etc.

High inflation in 2018-19 was due to the balance of payments crisis and triggered a strong recession; high inflation now has strong inertia but follows economic growth (recovery) which always poses inflationary pressures.

So on average, monthly inflation is not significantly different now than it was from II-2018 to IV-2019. It is more stable now, though.

As economic activity recovers to pre-2018 crisis levels, only now can we expect a more stabilized situation.

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Dollar & Inflation

The other side of the story is the external constraint. Inflation peaks have been related to the largest increases in the parallel dollar, reflecting BoP crisis and/or pressures (e.g. imports controls).

Only very recently, after the IMF agreement, has the parallel dollar (CCL) stabilized and declined. A relieved BoP shall allow continued growth with stabilized or gradually descending inflation.

Also the global context became way more inflationary and uncertain.

So, inflation won´t go down rapidly nor easily, and reducing it 5pp per annum is still an ambitious but realistic goal. De-stabilization takes a day, stabilization takes months and years. There is no magic to be done here.