Wednesday, August 19, 2009

Price Check in Aisle Argentina

NPR had a story this morning that the Argentine government is purposely underreporting the inflation rate in the country. Why would they do this?

As the story points out Argentina sold inflation indexed bonds, that is if you bought the bond you got a certain interest rate plus whatever the inflation rate was. So the government could save money on these bonds by under reporting an inflation rate.

Another way it could have saved money is if government workers received a cost of living adjustment (COLA). If the government reported inflation rate is lower than the actual rate it could pay workers less. Similarly, welfare payments may be linked to COLA.

Another issue is that hyper inflation has led to the downfall of several presidents including the 2001 peso crisis that saw 3 presidents it just 2 weeks. So maybe under reporting inflation is a way to help the current regime stay in power.

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