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Argentina freezes grocery prices to curb inflation: Curing the disease by controlling the symptom?

This past week, I was a little under the weather with a cold.  A few weeks before, my son got very sick when his cold transformed into some infection that sent his temperature soaring. So, I made sure to monitor my own temperature closely, and thank goodness, it never really crept above 98.6 F.  What does a temperature have to do with economics?  Well, it is just an analogy.   But for what?

I came across this article from the Buenos Aires Herald on how the government in Argentina has strong armed many of the top supermarket chains in Argentina to freeze their prices for two months.  A big part of the impetus for these price freezes is that in recent months, prices have risen between 2.6 and 2.9% per month, or an average of 2.75% per month.  If prices keep going up an average of up 2.75% per month for 12 months, that annual price rise is a whopping 38.5% inflation rate.  Consider this, no one will want to lend out money at a rate any lower than that annual inflation rate, or they would lose buying power.   That is, after a year of inflation of 38.5%, it will now take $138.50 to buy what you could have bought a year earlier for $100.  At inflation rates that high, everyone will want to get paid more often so that they can spend right away, before their money loses any more of its value.

Price freezes, if enforced by the government, will only result in severe shortages.  Think about the availability of bread, water and gasoline at stores 24 hours before a hurricane is supposed to hit.  Or think gasoline and ice a few days after a hurricane has hit.

If I were a grocer, I would not want to restock if the prices I was buying at kept going up and up while selling prices were frozen? Keep in mind that grocers’ markups, at least in the US, are only about 2%.

What is going on in Argentina is not too different than what is happening here as far as deficit spending.  When governments spend well more than they bring in in taxes, one of the ways that they pay for that deficit is by creating more money, in some places that is with printing presses.  If the money in the system grows faster than production, prices go up.

Increasing the money in the system because politicians want to spend more than they take in, causing inflation and then resorting to price controls to keep prices from going through the roof has happened across the centuries, and with the same effect, severe shortages.  For instance, Roman emperors often debased their currency, clipping off some of the silver in the coins to make new coins.   In 301 AD, Emperor Diocletian, after currency reforms that resulted in inflation, issued a famous edict that froze prices, with predictable results: shortages and black markets.  (Coincidentally, one of Diocletian’s currency reforms was the creation of several new coins, one of which was the argenteus, sharing a root with the name Argentina, both from the Latin word argentum, translated as silver, the metal used in the easily debased denarius.)

Inflation cannot be eliminated by putting limits on prices.  Increasing prices never cause inflation – higher prices is inflation, and the cause is increasing the money supply.  Diocletian did not understand this, nor do many leaders today.

Holding retail prices constant with price controls, when the natural or equilibrium price is higher, only creates shortages, as Diocletian found out and as we will soon see in class.  Freezing retail prices to bring down inflation is like trying to cure an infection by sticking your thermometer under cold water to cure your infection.

-MC

7 Responses to “Argentina freezes grocery prices to curb inflation: Curing the disease by controlling the symptom?”

  1. MPC says:

    What the government is creating is obviously a shortage. The price have to get in an equilibrium of demand and supply and when that equilibrium is reached then that is the right price to avoid shortage or avoid surplus. Government should see other ways to get rid of inflation instead of freezing prices for sellers and give them a shortage in their market.

  2. DJ says:

    It would seem that Argentina needs to do something about its prices soon. If it continues at this rate, the people are going to be paying way too much for everything. According to what you stated close to the end of your article, it appears that the only way for Argentina to lower its inflation is to decrease its money supply. When Diocletian froze prices he caused supply shortages and black markets. Instead he should have kept the new coins he was creating to himself. I guess he was not much of a leader in any area, as he is infamous for widespread persecution of his citizenry.

  3. Tiffany says:

    I do not agree with what the government of Argentina is doing. This is not fair to the grocer’s, because like Rebecca said, how are they supposed to make any money? I do not see how causing shortages, due to the governments selfish wants and needs, going to make the problem of inflation go away? I think the government and politicians need to get their priorities straight and control their spending instead of trying to control every one but themselves.

    • AP says:

      Wise word, however no government is perfect. Plus if we are being honest the US does a horrible job at cutting spending let alone controlling it. I am simply going to ask these two questions.

      1. What would you do to solve the inflation problem?

      2. Is there truly a way to forcefully solve inflation problems or do they have to work themselves out?

  4. Raymond says:

    I agree. Freezing selling prices would not stop inflation, athough at a 38.5% inflation increase a year, something has to be done.. Freezing prices will only lead strife. Sellers will not want to buy more product when they can’t sell it for a profit. Also, sellers may want to cut down on expenses such as firing employees leading to a higher unemployment rates. which in turn leads to more problems. This may lead to less money for sellers and the government because these unemployed people have even less buying power.Governments need to figure out how to control their budgets instead of trying to control the budgets of the buisness owners then maybe inflation would not be so severe. One question I have since they only freezing prices for two months, can’t the sellers increase their prices by larger ammounts after to make up for the lost? I may be wrong but isn’t this evidence that freezing prices would not work?

  5. Rebecca says:

    Freezing the selling price for products (like those in supermarkets) when their buying price is still uncontrolled doesn’t make much sense, if at all. How is the grocer supposed to bring income in if his selling prices are frozen by the government? And, they do this to try to stop inflation? Remarkable; it’s only going to cause shortages as you said. When they get their heads out of the ground and realize that this isn’t going to work and they need to find another way to control it.

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