Argentina’s 5 straight months of surging inflation undercount the severity, economists say

Inflation in crisis-prone Argentina accelerated more than expected and for a fifth straight month in January, the country’s statistics agency said Tuesday, a closely watched report whose outdated methodology in recent days stoked political turmoil and created a headache for libertarian President Javier Milei.

Consumer prices rose 2.9% last month compared with December, said the statistics agency known by its Spanish acronym INDEC, largely owing to increases in the prices of food, restaurants, hotels and utility bills.

Economists say that the formula that INDEC used to calculate the inflation rate still underestimates real price rises in a country reeling from Milei’s harsh austerity program that his close ideological ally, U.S. President Donald Trump, has backed with $20 billion and championed as a model for downsizing federal bureaucracy.

After months of mounting pressure, Milei’s government said it would redo the index used in the official inflation reports, which is currently based on consumption habits from 2004 and reads like a time capsule: Cigarettes, newspapers, DVDs and landline phones are considered key to the “basket” of goods and services consumed by the population.

The old formula not only fails to reflect how much Argentine households spend on present-day staples like Netflix subscriptions and iPhones, experts say, but also underrepresents the costs of public services like health care and electricity that have skyrocketed as Milei slashes subsidies. Rent has also shot up as Milei unwinds price controls.

“It is very likely that the regulated public service prices in Argentina will see a strong increase this year, and the new methodology for measuring inflation will give those increases a lot more weight,” said Camilo Tiscornia, director of Buenos Aires consultancy C&T Asesores Economicos and a former central bank official. “The government is engaged in a fight against inflation, so this index doesn’t help.”

An abrupt about-face reawakens economic trauma

Milei’s economic team was expected to apply the new index for the first time in Tuesday’s report.

But last week, officials backtracked and announced that INDEC would carry on using the obsolete formula.

The move revived memories of blatant tampering with inflation statistics by past populist governments, rattling investor confidence and public trust. The country’s widely respected national statistics chief resigned and Argentina’s benchmark S&P Merval stock index tumbled several percentage points last week.

“With this decision, a Pandora’s box was reopened,” said Sergio Berensztein, who runs a political consultancy in Buenos Aires. “I know the officials of the economic team, they are in no way going to repeat the mistakes of the past. But the public, the market, investors, society, have every right not to trust.”

Elsewhere in the world, perhaps such a technical-sounding government decision would fall to the domain of data wonks and financial consultants. But it was the talk of the town in Argentina, a nation of amateur economists weaned on years of uncontrolled inflation and violent exchange rate volatility.

“It generated a lot of questions. These controversies are never good for public opinion,” said Ana Stupi, a 58-year-old lawyer heading home from work in Buenos Aires on Tuesday. “I hope that everything can be transparent so that this economic stabilization continues.”

Under former President Cristina Fernández de Kirchner, who succeeded her husband Néstor Kirchner in November 2007, Argentina was accused of doctoring data to make inflation seem only a fraction as high as it really was.

Between 2007 and 2013, the government fired technical staff at INDEC and packed the agency with political allies to conceal a mounting crisis. Fernández’s government even deployed fines and threats of prosecution to muzzle independent inflation forecasts.

“INDEC was heavily manipulated for many years … I never trusted any of the data,” said 65-year-old pensioner Liliana Pastor. “We know that everything like that gets adjusted according to political needs.”

Experts say the government decision did far more damage than the release of a higher inflation rate would have.

“It puts a short-term goal ahead of a long-term strategy,” said Marcelo J. García, Americas director at geopolitical risk firm Horizon Engage. “It gives the opposition an opening to criticize more substantially the credibility of the numbers that INDEC is producing and therefore question the credibility of the government.”

Argentina’s inflation remains stubborn

The controversy further soured the national mood as Argentines increasingly lament that they’re absorbing all of the pain of Milei’s program and few of its benefits.

The main benefit so far — and the main cause of Milei’s glow of public approval — has been the government’s rapid reduction of Argentina’s notoriously high inflation, from over 211% annually in late 2023, when the radical libertarian leader took office, to 31% last year, according to INDEC.

Few dispute the importance of his victory. But many question its sustainability.

To bring down inflation, Milei has relied on deep spending cuts, an influx of cheap Chinese imports and a controversial exchange rate scheme that kept the Argentine peso stable against the dollar, leading some economists to consider it overvalued and making shopping sprees abroad inordinately cheap for well-heeled Argentines.

But after hitting a low of 1.5% last year, monthly inflation has more recently ticked up, reflecting lingering challenges as Milei struggles to cement his primary political achievement. Concern is also growing over how salaries have lagged behind inflation, shriveling in value and squeezing household budgets.

“At the end of the day, prices are about what you can buy with your salary. Here and now, it’s obvious that you can buy less than you did a couple years ago,” said Facundo Diaz, a 33-year-old graphic designer.

In the coming months, further subsidy cuts risk fueling higher inflation, as does a looser foreign exchange rate policy that allows the peso to move more freely in the currency market.

“Milei seems sort of puzzled by the fact that his theoretical beliefs led him to expect inflation to go down sharply, but he’s facing a different reality that calls that into question,” said Ignacio Labaqui, a Buenos Aires-based senior analyst at risk consultancy Medley Global Advisors. “Most countries between six to eight years to go from the levels of inflation that Argentina had to a single-digit.”

Bad inflation news brings relief

Although Tuesday’s higher-than-expected rate of 2.9% deals a blow to Milei’s war against Argentina’s chronic price pressures, some experts expressed relief.

In outpacing even most private-sector calculations, the INDEC inflation figure published Tuesday dispelled concerns — at least for now — that the government was cooking the books in any way comparable to his predecessors.

“Fortunately, January’s inflation was high enough that nobody can really say that the index was manipulated,” Berensztein said. “If the figure had been 1.2% or 2%, it would not have been credible.”

This story was originally featured on Fortune.com