Don’t worry: Inflation in Argentina is under control says Cristina Fernandez de Kirchner

Many are doubting INDEC’s statistics

Inflation in Argentina is becoming a problem. Once the prices go up, communities begin to object and eventually the media becomes involved. Although this is not uncommon, there have been several debates regarding how much prices should increase and why.

In response to this, the International Monetary Fund (Fondo Monetario Internactional) have visited different provinces, so that economists and statistics experts from multilateral organisations are able to elaborate an inflation rate that could be used on a national level. The International Monetary Fund was surprised to learn that Córdoba’s (an Argentinean province west of Buenos Aires) statistics are in fact recorded by technicians in Buenos Aires. “Our general management does the field work and supervision. And the burden of data computation is carried out by INDEC – the official statistics office – in Buenos Aires”, explained Paul Sobrero, Córdoba’s statistical holder.

In Córdoba, a local system to measure consumer prices would not work because “to launch such system would implicate a loss of two to three years and we do not possess the methodology in order to undertake such process of comparability, something that is not impossible for the national INDEC”, an official said. In 2010, the inflation in Córdoba was 14.1%.

Mendoza has released an inflation rate of its own this year recording a 0.8% in January with an increase to 0.9% in February. During these months, INDEC mentioned only an increase of 0.7%. In Mendoza, the inflation perceived over 2010 was 20.7%, almost doubling the 10.6% figure given by INDEC for Capital and GBA (Gran Buenos Aires). The highest indicator, however, is Jujuy with a whooping 32.9% inflation rate.

Clearly, there are noticeable differences between the given figures and real figures. Following this discrepancy between records by provinces and official records by INDEC, many opposing politicians, economists and consumers believe the true figure to lie between 25% and 30%, at least for this past year of 2010.

The government has further threatened to fine economic consultants if they do not release how they calculate changes in consumer prices. Guillermo Moreno – Commerce Secretary who has been responsible for defending official figures published by the government – has fined economists on several occasions for releasing what they believe to be the true figures, which are of course not in accordance with official numbers. His line of argument quotes lack of evidence and scientific research leading to unnecessary distress of members of the public. Supporting Moreno is Sergio Kiernan, an editor, saying, “The government still has inflation under control. Inflation is better than recession. Most people here are doing alright”.

It is still a mystery why inflation is so high. Some believe it is due to the government digging into central reserves whilst others think that speculators are driving costs up, in turn causing members of the public to increase their prices in order to keep up. The official reason given by business leaders is public spending.

Inflation has been an on-going problem in Argentina that needs tackling. Will the government support the community? They will have to listen at least, since they soon face elections, coming up in October.

Japan is facing a nuclear meltdown; can the same be said about its economy?

Emergency teams rally to secure the nuclear reactors

On Friday 11th March at 14:46 local time, the largest earthquake in Japanese history (8.9 Richter) struck the area of Tohoku, located off the coast of Japan. This powerful tremor triggered a tsunami destroying a large part of the northeast. In response to these sudden events, warnings have been sent to as far as California and Chile. Interestingly, the word ‘tsunami’ comes from the Japanese ‘tsu’ meaning ‘harbour’ and ‘nami’ meaning ‘wave’.

The intensity and strength of this quake did not only reach the aerial atop of Japan’s landmark – the Tokyo Tower – leaving it bent, but also the nuclear power plant of Fukishima Daiichi located 240km from Tokyo. Four of the plant’s reactors have been damaged and consequently citizens have been asked to conserve energy. Naoto Kan, Japan’s prime minister, said the country was now experiencing “its worst crisis since the Second World War”, as it handles the aftermath of the calamity. Over 10,000 people are believed to have died, although the official death toll lies at around 4,000. Meanwhile, hundreds of thousands of people have spent the past few nights at shelters, with little food and water supplies.

This disaster is not only having an impact on human life but also on Japan’s economy. In the past few years – with particular attention to the past few months – markets have been greatly unstable. In order to decrease the current unease amongst markets, Masaaki Shirakawa, director of the bank of Japan has reacted fast and informed that he would provide liquidity – amounting to a total between £15.2bn-£22.8bn, according to the Financial Times – in order to keep borrowing costs low. Experts have wide-ranging perspectives on what is to be of Japan’s economy – the third biggest in the world. According to a certain risk modelling company it is estimated that in the worst-case scenario this tragedy will cost Japan as much as $35bn (approx. £22bn). Seeing as before the quake Japan was still in ‘recession’, its vulnerability at this time is large and the economy is definitely taking a hit, which in turn is unnerving global investors. Consequently, commodity prices have fallen – in particular oil prices, falling to their lowest levels all month – as the demand for these from one of the world’s leading economies, has rapidly dropped.

At the same time the Yen rose to its highest in 15 years following the belief of investors that Japan will need to redeem overseas assets in order to cope with the costs of the country’s reconstruction and insurance pay-outs. To combat the investor’s exploitation of Japan’s current misfortune – by attempting to drive up the prices of the Yen – some of the world’s most powerful central banks have decided to sell billions of dollars worth of Yen. The fact that there is more Yen available means Japan is able to pay less for buying back its currency.

Despite the severity of the current situation, it is believed that in the long-run Japan’s economy is likely to bounce-back. Yes, there is an obvious halt to economic growth and in fact, exports from various manufacturers have temporarily stopped placing the country in a semi-standstill, however, one has to note that following the Kobe earthquake in 1995 Japan made an impressive come-back. Even Japan’s own representatives are downgrading the economic impact of the disaster and in particular, Kaoru Yosano – a minister for economic and fiscal policy – says that the areas most affected account for only 4.1 per cent of Japan’s GDP.

Finally, according to Jasper Koll – head of research at JP Morgan in Tokyo – “Japan will recover, there’s lots of resources, there’s lots of funding and there is a tremendous amount of excess saving here and, ironically, this disaster will actually shake up the Japanese government and policies are going to add tremendously to growth”, adding that “T?hoku – the region that is being affected – is about 8 per cent of the national economy.” We hope that this difficult situation that Japan is facing will be remedied soon.

Libyan protests fuel the increasing threat to international oil markets

European oil imports from Libya

Antigovernment protests affecting the Middle East and North Africa have now escalated to previously unforeseeable levels of widespread socio-political unrest. These unprecedented events are a consequence of the rising demand of rights similar to those found in Western liberal democracies and have directly led to a state of negative economic backlash. Perhaps, western observers should be asking, is the West to fear yet another an oil crisis?

Contrary to the Egyptian leader’s decision to step down after weeks of protests and obvious feelings of disenchantment with the regime, Libya’s dictator Muammar Gaddafi – who has been in power for over 40 years – has resolved to remain in power by opting to start a civil war-like conflict. Despite accusations from home and abroad, Gaddafi denies any wrongdoing by claiming that those protesting are members of al Qaeda and that “all his people love him”.

From an investor’s point of view, having dictators rule a country is not necessarily economically unfavourable as one might see them as contributors to the stability of the nation in question. It is probable that this is the reason the West had few qualms surrounding the previous state of oil imports from Libya. In certain situations of the past, this has proved to be true. In any case, sometimes the existence of dictatorially-created stability helps attract more investors that are in return willing to turn a blind eye to possible domestic issues, especially in emerging markets such as Libya that offer high-risk but also potentially high-gain economic opportunities.

Libya typically produces around 1.4m barrels of oil a day, which is around 2% of petroleum for export on the world market. This might sound like a small figure but the unfolding of the current events is having a colossal impact on international oil markets. To begin with, many oil workers have fled the country causing a significant decrease in oil production and thus affecting oil export to Western countries. Amongst locations with a reported decrease in petroleum production is Brega, home to Libya’s second-largest oil facility. Although the facilities here have not yet been damaged, Mohammed Khamis, an employee at Sirte Oil Company, has said last Thursday that these were operating “at less than 10 per cent capacity”.

As Libyan petroleum extraction, refinery and exports are being jeopardised, tremors are being sent throughout the world’s economy. There is undeniable fear amongst investors and traders: the cost of a barrel of Brent crude oil has risen from a low of $80 (approx. £49) last year to around $115 (approx. £71) – an increase of approximately 44% – according to the Economist. The situation is so severe, that US Federal Reserve chairman Ben Bernanke said “if rising commodity prices threaten to trigger inflation or choke off the economic recovery,” then they are “prepared to respond as necessary”.

The world has learned from the past when political changes caused large disruptions in oil supplies and has dealt with these changes via OPEC (Organisation of the Petroleum Exporting Countries) that aimed to strive off interruptions to world oil supplies. The problem however, even with OPEC in place, is the cost of transportation is still an issue. It is considerably cheaper to have oil transported from Libya due to its strategic geographic position in relation to Europe. This is why with the fall in production from Libya, oil prices are increasing proportionally to transportation costs needed to cover the distance of oil producers from further locations such as Saudi Arabia.

OPEC is an intergovernmental organisation created in order to regulate oil production by primarily controlling the ratio of oil that each member country is allocated to produce. In addition, the classification of oil as a commodity is another technique employed by the financial industry to help regulate its price. By employing this technique, the industry recognises that oil is valued equally regardless of the country of production. This makes trading oil much simpler since the only influential factor is price per barrel.

The Economic Effect of the Libyan Protests

The effects of the Libyan protests are indisputable and very-far reaching. One must note that some countries, like Switzerland, have a strong reliance on Libyan oil, with over 50% of petroleum coming directly from Libya. Italy encounters another significant problem, as it is Libya’s biggest trading partner: with the EU Debt crisis that has deeply affected countries like Greece and Ireland, many analysts believe that Italy may be amongst the countries soon to follow suit. Given Italy’s already delicate situation, if the EU decides to sanction Libya, then Italy itself may become ‘the straw that broke the camels back’, in respect to the EU Debt crisis.

BP is also finding itself in greater financial difficulties after having only just recovered from the economic setback of the Gulf of Mexico spills, which caused them a loss of $4.9bn, according to the Financial Times. The issue with oil production in Libya, as a result, may only serve as a detriment to its recent economic recovery.

How Does This Affect You

Historically, a small increase in oil prices was sufficient to prompt a recession, with this effect being greatest in the fifties. Even though in today’s economy we are not as dependent on oil, any change on its costs acts as a tax on commuters and cuts spending power of individuals.