Will price controls end Argentina's uncontrollable inflation?
Recently, Argentina’s Commerce Secretary announced a series of widespread price controls, on over 1300 products, to curb the country’s over 50% annual inflation. The measure's rollout was clownish at best, with negotiations with companies breaking down because of the government's unrealistic assertions of their inflated profit margins. Furthermore, the prior Commerce Secretary had been ousted over her failure to end inflation, and took with her the laptop containing all the information about prices needed to properly implement the measure. Consequently, the authorities used the prices from a 2019 round of similarly intended controls, with the little issue that roughly 48% of those products didn't exist anymore.
Can this measure work? No. Let’s start with the basics: what is inflation? Both traditional and heterodox stories of inflation are quite simple in nature, and pretty similar.
The mainstream story can be summarized as MV = Py, where M is the amount of money, V is the velocity of money (i.e. how fast people spend every bill, so to speak), P is the price level, and y is real output. This equation (the quantity equation) is always true, because both sides equal Y (nominal income, or output), but cannot explain much about reality without assumptions about M, V, P, and y. If you assume V is not influenced by monetary policy, and y isn’t under certain conditions, then changes in M are reflected as changes in P. The explanation for inflation therefore derived is simple: too much money (M) chasing too few goods (fixed y). Adding a series of complex assumptions about labor and product markets, you could more or less reach the conditions for M not increasing y, and thus how effective monetary policy is at both boosting output/income, and creating or slowing inflation.
More heterodox stories focus on the goods market; instead of being a primarily monetary issue, inflation is a matter of specific items. Demand for these items is high, and for non-monetary reasons supply is constrained. Inflation happens when these constrains on the supply-side, known as bottlenecks, pile up. Regardless, the basic story is the same: too much many chasing too few goods, although the policy implications are different.
There’s, broadly speaking, two more determinants of inflation to tackle. The first is past inflation: inertia. It’s important because, if firms fon’t set prices simultaneously or consumers don’t observe them at the same time, past inflation can ripple out into the future. Secondly, expectations. If people and/or companies expect more inflation, they might change their patterns of saving/investment, which items they produce, and the specific timing of purchases and sales - affecting inflation.
So why can’t price controls change inflation? Firstly, knowledge. The government doesn’t have boundless knowledge of the quantities and cost structures of each product in the economy. It doesn't even have much of it, in fact. If it did, it could help out the companies that are shortchanged and stop inflation, or increase supply in non-neutral ways. But because it doesn't, and can't have enough information, policies to stop inflation are basically just guesses - and the Argentinian government has wrong erred on the basis of making really poorly informed ones, if informed by anything other than ideological biases.
Secondly, the only channel price controls could conceivably act on, if not by relieving pressure on supply somehow, is on expectations and inertia. Cavallo et al. (2017) argues that consumers form expectations by, in layman’s terms, going to the shop and looking at prices. If you have detailed enough information on what consumers buy, you could keep expectations of future inflation under control and lend credibility to a price stabilization push. The problem is that that kind of data is highly propietary, and it’s unlikely companies would share it unless they had enormous trust on the government - which, reasonably enough for the bellicose clown show described in the first paragraph, they don't.
What about shortages? The classic refrain against price controls is that they cause shortages of the goods they target - truth is more complicated than that. Imagine that all companies make two sizes of their product: large and small. Say both of them are targeted by controls. Companies might get around a freeze by creating a new size, medium, and shifting production from both of the other sizes to the new one. Ergo, you would have a shortage of old products, but an abundance of newer, expensive ones - a mechanism observed in Argentina's prior round of election year price freezes (2007 to 2015). In an infamous example of how the controls (don’t) work, Argentinian cookie companies were fined by the Commerce Department for skirting controls by increasing the weight in their packages - by 1 gram. Or, for instance, if an item can be sold both room temperature and cold (like a beverage), stores might not sale the price controlled size at the more popular temperature.
This gets to the core of Argentina's inflation problem: unlike the United States, or most developed countries, inflation is likely to go on for a while. Because of restrictions on trade (which is nearly two thirds production inputs), high taxes, and extremely uncertain future economic policies and conditions, companies are unlikely to invest - capping output in the short run. The government has run a colossal deficit of over 4% of GDP in 2021 so far (not to mention the one nearly twice that size in 2020), financed purely by printing money (known by experts as seigniorage). This bizarre choice has been due to the paltry domestic credit market (caused by unpredictable inflation yielding unpredictable, frequently negative returns), and the government being locked out of international credit due to its (well earned) reputation for irresponsibility. An avalanche of money chasing an, at best stagnant and normally shrinking, amount of goods and services is a recipe for inflation regardless of what the hell you think is occurring in the mysterious ethereal world of the firm. No amount of price controls, however well intentioned, can counter that.