VZCZCXYZ0007
RR RUEHWEB

DE RUEHBU #1685/01 3471248
ZNR UUUUU ZZH
R 121248Z DEC 08 ZDK
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2680
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001685 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV AR
SUBJECT: Argentina: Inflation Down as Economy Slows 
 
Ref:(A) Buenos Aires 656 
    (B) Buenos Aires 629, 532, 284, 159 
    (C) 07 Buenos Aires 2112 
 
This cable contains sensitive information - not for internet 
distribution. 
 
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SUMMARY 
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¶1. (SBU) In line with Argentina's economic slowdown, real monthly 
consumer inflation rates have decelerated over the past five months 
from the 25% range to an something near 20% in November 2008.  Food 
and beverage inflation, an important contributor to poverty 
measures, is showing the largest declines.  Official GoA inflation 
measures have also been trending downward but, at an annualized 7.9% 
as of November 2008, it remains less than half of independent 
measures.  The GoA has attempted to polish the tarnished credibility 
of official statistics agency INDEC over the past year, including by 
sending senior INDEC officials to Washington meet with their US 
counterparts, hosting international conferences to review INDEC's 
CPI methodology, and by hosting an INDEC open house for local 
business community leaders.  These efforts have foundered in the 
face of credible suspicions that INDEC officials are selectively 
cherry-picking or outright falsifying CPI price input data.  Some 
local analysts argue that current declining real inflation levels 
now offer the GoA a face-saving opportunity to normalize its 
official inflation by gradually raising official rates to bring them 
in line with real market rates.  However, there is no indication to 
date that the GoA is moving to take this course of action.  End 
Summary 
 
-------------------------------------------- 
Variances in Official Vs. Real Arg Inflation 
-------------------------------------------- 
 
¶2. (SBU) The GoA's official Consumer Price Index (CPI), compiled by 
government statistics agency INDEC, rose 0.3% in November, yielding 
a 7.9% annual inflation rate for the prior 12 months period (down 
from an 8.4% annual rate the prior month).  Official INDEC monthly 
rates have been trending downward from the 0.9% level in late 2007 
to the 0.4% to 0.5% level over the past four months. 
 
¶3. (SBU) It is widely believed that official INDEC CPI numbers have 
been manipulated since January 2007 to understate politically 
sensitive inflation and linked poverty measures (Ref A).  As a 
consequence, numerous independent organizations have been 
reproducing INDEC's CPI methodology with their own CPI price 
samples.  Their results show domestic inflation considerably higher 
than official rates: reputable Evaluadora Latinoamericana's (EL's) 
preliminary inflation estimates for November 2008 is 0.6% (an 
annualized prior 12-month rate of 20.3%), double the official INDEC 
rate.  Other independent analysts, including Prefinex, Estudio Bein, 
De la Vega and Ecolatina, are estimating November inflation somewhat 
higher in the  0.7% - 0.9% range).  EL's breakdown of November 
inflation highlights Medical and Health Care services as the CPI 
component with the largest annual increase (30.4%), followed by 
Education (up 29.0%).  Food and Beverages, an important contributor 
to poverty measures, is shown up an annual 22.1%.  Other economists 
place this Food and Beverage rate of increase at between 15% and 
20%. 
 
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Economy Slows, Real Inflation Down 
---------------------------------- 
 
¶5. (SBU) Notwithstanding minor variance among independent Argentine 
inflation estimates, all show inflation has decelerated over the 
past five months.  EL shows annualized CPI growth peaking at 22.7% 
in August 2008, with all components except Housing trending downward 
thereafter.  Food and Beverages showed the sharpest decrease in the 
rate of growth; Adelco and Camilo Tiscornia Associates, attribute 
this to the sharp drop in global commodity prices. 
 
¶6. (SBU) There is general consensus among Argentine economic 
analysts that inflation is dropping not as a function of the GoA 
implementing standard anti-inflationary macroeconomic policies (i.e. 
maintaining positive real interest rates or equilibrium real 
effective exchange rates) but rather because of a deteriorating 
economic climate, including lower consumption and production 
activity indicators and higher levels of unemployment.  Analysts 
caution, however, that anticipated further nominal depreciation of 
the Argentine peso could sustain inflationary pressures.  In a 
December 11 meeting with the Ambassador, former Economy Minister and 
2007 opposition presidential candidate Roberto Lavagna predicted 
that 2008 real inflation would remain in the 20% range. 
 
--------------------------------------------- --- 
. . . Along with Inflation & Growth Expectations 
--------------------------------------------- --- 
 
¶7. (SBU) The decline in real inflation levels has also impacted 
inflationary expectations: according to Di Tella University's 
monthly reporting, 12-month inflationary expectations in both 
September and October 2008 stood at 25%, down from an April through 
August 2008 peak of 30%.   Fundacion Mercado's December 3 report 
shows that "positive expectations" that inflation rates will decline 
more than doubled in November.  Consulting and survey group 
Poliarquia has just removed inflation as one of the most relevant 
concerns for the general public.  However, Poliarquia also show a 20 
percentage point drop in their index of expectations on future 
economic prospects, and growing concerns about employment. 
Fundacion Mercado's show their index of general consumer economic 
expectations dropped 2.6% and their employment expectation 
expectations dropped 6% in November. 
 
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Failed Effort to Polish INDEC's Reputation 
------------------------------------------ 
 
¶8. (SBU) The GoA's alleged manipulation of price data at INDEC began 
in January 2007 when Secretary of Commerce Guillermo Moreno replaced 
a number of INDEC technical experts with his own proteges. Later, 
INDEC CPI methodological criteria were modified to restrict the 
basket of CPI goods measured to include a higher proportion of GoA 
price-controlled basic consumption items (Ref B).  At the same time, 
provinces including economically important Mendoza and Santa Fe 
which maintain their own independent CPI statistical units, were 
encouraged to synchronize their CPI methodologies with INDEC's. 
These steps were highlighted in local media and interpreted by local 
analysts as heavy-handed GoA efforts to politicize and control 
statistical reporting.  As a consequence, INDEC's reputation as a 
credible and independent statistics unit has been seriously 
tarnished. 
 
¶9. (SBU) In an effort to enhance INDEC's reputation, INDEC's 
politically appointed leadership has, over the past year, sent 
senior INDEC officials to Washington meet with their US counterparts 
(Ref C) and hosting international conferences with invited U.S., 
French and Spanish statistical experts to review INDEC's CPI 
methodology.  However, the consensus of local analysts has been that 
the issue is not whether INDEC's CPI methodology is trustworthy per 
se, but rather that there remain credible suspicions that INDEC 
officials are selectively cherry-picking or outright falsifying CPI 
price input data. Such price data manipulation, they argue, is what 
has kept monthly official inflation reports between one third and 
one half of independently calculated levels. 
 
¶10. (SBU) On his assumption as new Chief of Cabinet in July 2008, 
Sergio Massa publicly commented on the need to recover public 
confidence in INDEC.   In early October 2008, Massa invited 
Argentine business leaders, including representatives of the 
Argentine Industrial Union (UIA), the association of local banks 
ADEBA, the Chamber of Commerce, the Chamber of Construction, and 
individual entrepreneurs to an INDEC open house to discuss CPI 
methodology.  This was to have been the first of a series of public 
meetings that would later include union leaders 
(Major Argentine unions had established their own in-house cost of 
living indices to justify sector-specific wage claims that tracked 
real inflation levels.)  However, the initiative faltered and no 
follow-on meetings have been held to date. 
 
--------------------------------------------- --- 
Inflation Down - Chance to Regularize INDEC CPI? 
--------------------------------------------- --- 
 
¶11. (SBU) Some independent analysts have argued that declining real 
inflation levels - albeit due to an economic slowdown - offer the 
GoA a face-saving opportunity to normalize its official inflation 
reporting.  With "real" monthly inflation rates now closer to only 
twice average officially reported levels (versus nearly three times 
their levels from mid-2007 to mid-2008), these analysts see the 
economic slowdown as a chance for INDEC to gradually raise its 
official rates in order to bring them inline with real market rates. 
 Recent official INDEC monthly CPI releases, however, offer no 
indication that the GoA is moving to take this course of action. 
 
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Comment 
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¶12. (SBU) A slowing economy has achieved what GoA heterodox economic 
policy could not - a decline in real inflation levels and, 
importantly for upcoming wage negotiations, inflationary 
expectations.  The good news is that polls now indicate that 
inflation is no longer one of the top concerns of the Argentine 
man-on-the-street.  The bad news is that there is no indication that 
the GoA plans to take this opportunity to regularize its official 
inflation reporting and polish INDEC's tarnished image. 
 
Wayne