The International Monetary Fund is right to put Argentina’s inflation statistics under scrutiny. It has asked the government for clarifications of its data and procedures. Fudging inflation data cheats the holders of Argentine inflation index-linked bonds. However, Argentina is not alone in playing games with the figures backing its indexed bonds.
Suspicion over Argentina’s inflation figures arose when former president Nestor Kirchner replaced the head of the statistical agency, Indec, in January 2007, ahead of last year’s election, to “improve operations.” In April 2007, private economists estimated that Argentine prices rose 3.6%, while Indec reported a drop of 0.2%. Argentine monetary and fiscal policies have remained loose, yet Indec reports that inflation declined over the past year from 13% to 8.5%. Private sector economists currently estimate Argentine inflation at 22% to 26%.
There’s more than accurate statistics at stake. Argentina has $30 billion (Rs1.19 trillion) of indexed debt outstanding. Currently, the 2033 series yields 8.5%, a 6.8 percentage point premium over comparable US Treasury Inflation Protected Securities (TIPS), compared with a yield premium of 4.5 percentage points over Treasuries for Argentina’s dollar bonds. If inflation were understated by 1 percentage point a year, Argentina’s index-linked bondholders would lose $300 million annually in interest and principal.
Other countries’ inflation-linked bonds are also suspect. The US only began to issue TIPS in 1997, after adjusting its consumer price index for supposed “hedonic” improvements in product quality, which are estimated to reduce published inflation by about 0.5-1 point annually. Conversely in Britain, the government in 2003 moved the indexation of pensions to a new “consumer price index” currently rising at 2.2%, but was unable to change the indexation of gilts, still linked to the older and more accurate retail price index, currently rising at 4.1%. This difference is reflected in the two securities’ yields, currently 1.74 percentage points for 30-year US TIPS and 94 basis points for equivalent indexed gilts.
For investors seeking to hedge their inflation risk, there are two solutions. One is to accept only gold-clause bonds, since that commodity is freely traded internationally. The other is to restrict investment to indexed bonds of countries where the inflation index is sound, such as Brazil, where the independent Getulio Vargas Foundation has calculated inflation figures since 1944.