Milei’s anti-inflation drive pushes Argentina towards Brics

Argentina’s Javier Milei must have breathed a sigh of relief when he saw last week’s inflation data. It showed the first annualised decline since the President took a major gamble by allowing the peso to devalue late last year, with inflation falling from 292% in April to 276% in May.

While the country is still experiencing inflation levels that would be unthinkable in most countries, Milei’s supporters are taking this data as evidence that the economy is adjusting to the President’s reforms. But this interpretation is likely based on a misunderstanding of what is actually driving Argentina’s inflation. Milei and his supporters have convinced themselves that the culprit is too much government spending. He has engaged in aggressive cuts which have resulted in a government surplus. The problem, however, is that there is no evidence that government spending is driving inflation.

In 2022, for example, the Argentinian government posted a deficit of 2.4% of GDP. This deficit had fallen from the previous year, when it was 3.1% of GDP. In the same period, inflation rose from 38% at the start of 2021 to 95% at the end of 2022 — a decreasing government deficit was accompanied by rapidly increasing inflation.