Argentina's Monthly Inflation Rate Halved to 4.2% in Boost for President Javier Milei's Austerity Program

Argentina's monthly inflation rate has halved to 4.2%, the lowest since January 2022, according to data released on Thursday. This significant drop is a welcome respite for President Javier Milei's government, which has been grappling with the country's worst economic crisis in decades. The government's statistics agency reported that the monthly inflation rate in May plunged to 4.2%, down from 8.8% in April and a peak of 25% last December.

However, despite this positive development, Argentina's annual inflation remains among the highest in the world, at 276% as of Thursday. Many Argentines are skeptical about the impact of this decrease, citing stagnant wages and the devaluation of the currency last year, which pushed prices up.

Why it Matters : The success of President Milei's severe austerity program hinges on his ability to tame Argentina's sky-high inflation. The country's economic crisis has been exacerbated by a bloated state, and Milei's plans to slash state spending and boost his powers have been met with resistance from opposition senators. The passage of his legislative proposals is crucial to restoring investor confidence and stabilizing the economy.

In a significant development, the Senate passed sweeping proposals to overhaul Argentina's troubled economy, including measures to trim the fiscal deficit, incentivize foreign investment, and privatize some state-owned companies. The legislation will return to Congress' lower house for final approval, where it's expected to become law.

Markets reacted positively to the news, with Argentine sovereign bond yields jumping 3.5% and the country-risk index dropping more than 6%. The peso, Argentina's currency, dipped to $1,220 on the black market, narrowing the gap between the official and informal exchange rates.

President Milei hailed the vote as a "triumph," but opposition senators scrapped an income tax package and watered down other parts of the bill after a daylong debate marked by clashes between police and protesters in Buenos Aires. The legislation aims to resolve Argentina's worst financial crisis in 20 years, but critics warn that the measures will hurt local industry.

Changes to the labor market would make it easier for employers to fire workers by extending trial periods that allow dismissals without cause. A tax amnesty would allow Argentines to register their undeclared assets at home and abroad without paying heavy taxes. The Senate's rejection of a few other measures, including the lowering of an income tax threshold and pension cuts for civil servants with fewer than 30 years on the job, complicates Milei's fiscal consolidation.

Pressures are mounting over Argentina's rapidly depleting foreign exchange reserves as the government struggles to repay its massive foreign debt, including $44 billion owed to the International Monetary Fund and $18 billion in a currency swap line with China. On Wednesday, the central bank said it had agreed with China to postpone $5 billion in debt repayments that had been coming due in the next month.

Annual inflation in Argentina is nearing 300%, and Milei's austerity is hitting the population hard. More than half of all Argentines now live in poverty. The left-leaning Peronist movement, aligned with former president Cristina Fernández de Kirchner, decried the bill's passage as the latest political catastrophe for Argentina.

Key Takeaway :

• Argentina's monthly inflation rate is down to 4.2%, yet annual inflation remains one of the world's highest at 276%.

• President Milei's austerity measures aim to resolve Argentina's worst financial crisis in two decades.

• The Senate's approval of Milei's legislative agenda is critical for economic stability and investor confidence.

• Opposition senators resist Milei's plans to cut state spending and consolidate power amid economic challenges.

• Argentina faces depleted foreign reserves and struggles with massive foreign debt repayment.