Jan Dec Nov Oct Jan '06
Forecast 1.4% 0.9% 0.8% 0.8% 1.3%
Actual -- 1.0% 0.7% 0.9% 1.3%
Inflation during the month of January is expected to rise on seasonal summer holiday factors, although data methodology has come into doubt this week following the government's ouster of a technocrat in charge of inflation calculations.

At the same time, it is unclear when - or if - a major hike in health insurance costs will hit the consumer price index.

The median forecast from a Dow Jones Newswires survey of five economists has the consumer price index rising 1.4% in January from December.

Government statistics agency INDEC is slated to release the official January CPI data Monday Feb. 5 at 4:00 p.m. local time (1900 GMT).

Inflation is almost always strong in January, a month when Argentines head en masse to the Atlantic coast for their summer holidays. The wave of vacationers drives up the cost of hotels and other services within the CPI's "entertainment" category.

For Horacio Pozzo, an analyst with local consultancy Fundacion Capital, which sees inflation rising 1.3% on the month - on par with January 2005, "last month had much more volatility than January of last year."

The reason: while food and drink, and transportation costs - specifically taxi and inter-provincial bus fares - rose in January, other, harder to measure price factors also appeared. Among gray elements in January, the government raised export taxes on soy to subsidize meat and grain producers who are seeing their margins shrink on year-old government-brokered price controls, Pozzo said. "It is unclear how the subsidy program will affect prices," Pozzo said.

Additionally, it is unclear how the government will measure the increase in insurance premiums. Although the government authorized a premiums hike for January, many of them were not sent to clients until this week - after January data was largely collected. What's more, observers are unsure how the government will measure the two-tiered increase, which offers clients a 22% flat increase for full coverage, or a staggered 6% increase for those who opt for a co-payment system.

There has been some speculation that the 22% premium increase, which insurance companies are billing as a "new product" that carries additional benefits, will be considered a non-CPI basket item. If that were the case, "it's as if the government is disguising the real increase," Pozzo said. If all insurance premium increases were incorporated into the January data, the CPI would show an on-month increase of around 1.6%, Pozzo estimated.

Inflation has been a concern for government planners in recent years as the nation robustly recovers from its 2001-2002 economic collapse.

After inflation rose by 12.3% in 2005, the government launched a series of ostensibly voluntary price controls in a bid to avert runaway inflation. Last year, the CPI rose by 9.8% and is expected to come in just above 10% this year.

The on-month rise this January is seen coming in above the 1.1% initially forecast in the Argentine Central Bank's most recent survey of economists published in early January.

Against this backdrop, the government this week ousted INDEC's CPI department director, Graciela Bevacqua, in favor of an Economy Ministry official with close ties to the minister, Felisa Miceli.

The news of Bevacqua's ouster not only generated local headlines, it sent inflation-linked Argentine bond prices lower Wednesday.

Analyst Juan Francisco Foa of local Banco Frances BBVA, which put out a market report on the negative local bond market reaction, said all eyes will be on INDEC.

"The first reaction has been one of skepticism about Argentina's official data," Foa said. "Going forward it will be key for INDEC's credibility to see how it measures CPI. If, for instance, they don't include the health insurance rate hikes in the CPI basket, it would be a very bad sign."

If the rate hikes are indeed measured in the CPI - but not largely measured until February, the impact on month-on-month inflation would be easier for government planners to stomach since inflation pressure eases as summer vacations wind down.

For example, "summer rentals on the coast drop by 20% to 30%," said economist Gabriel Caamano, of local consultancy Estrateco. "That's why February would be a good month to incorporate the insurance premium rate increases."

Serena Saitto contributed to this article

ARGENTINA'S CPI BONDS LOSE LUSTER AS STATISTICIAN IS SACKED

By Michael Casey

Argentine bonds should have shared in a global rally Wednesday after the U.S. Federal Reserve released a friendly message to markets.

Instead they fell on reports that Economy Minister Felisa Miceli had removed a senior staffer responsible for calculating the consumer price index at Argentina's national statistics agency, INDEC.

It came as a sharp shock for holders of the country's inflation-linked bonds. Could they continue to trust Argentina's numbers? Were the indexed bonds in their portfolio worth what they'd thought they were?

For those who live by the act-now, ask-later creed, a shortage of details on the case didn't matter. The slightest hint of dirty play, or the mere possibility of it, was enough. They sold out.

"You can't buy an asset whose prices are based on an index that you think might be manipulated," said Carola Sandy, an economist at Credit Suisse in New York.

CPI-linked Argentine bonds ended Wednesday with losses ranging from 0.15% to 0.88% - not a disaster, but a dismal result on a day in which the Fed hinted that interest rate hikes were off the table. By comparison, Brazil's Global 2040 bond, jumped 7/16 to 131 5/8 on Wednesday.

Argentine bonds recovered Thursday, but sentiment has taken a beating.
The circumstances behind long-term INDEC staffer Graciela Bevacqua's replacement with an outsider are vague, though it's believed to stem from a dispute over the treatment of health insurance premiums in the January CPI report, which is scheduled for release on Monday.

The government, which is eager to prove the effectiveness of its controversial price controls system, was concerned that a recent 22% hike in health insurance premiums would drive up the January CPI. Even excluding the health costs, forecasters were putting the index up 1.4% from December.

Miceli's team argued -- with some justification, economist said -- that the health care premiums should have been reported in February. It is thought that Bevacqua resisted this.

But if her dismissal was an attempt to improve the government's inflation-fighting image, it may well have backfired. Now, both Wall Street analysts and Argentine consumers will be looking to Monday's release with a leery eye.

"There was an emerging consensus that inflation was going to be on the high side of expectations and maybe as high as 1.5%," said Fernando Losada, an economist at ABN Amro in New York. "If the numbers end up being much lower than that then the market will react negatively and the CPI-linked bonds will fall."

This scrutiny will continue through the year, he said, with the market looking for patterns to see if the CPI consistently comes out under consensus.

Inside Argentina, there is particular concern about reports that Bevacqua's expected replacement at INDEC, Beatriz Paglieri, will be appointed directly, bypassing a peer review system that's supposed to protect the agency's independence.

"Even if the new CPI director is technically very skilled, the method through which her predecessor was removed and substituted raises questions," said Fausto Spotorno, chief economist at the Orlando Ferreres consultancy in Buenos Aires.

With many industries now entering wage negotiations, some also fear that union negotiators will now feel less confident in the data upon which their claims are based and will therefore make them more aggressive. And this, of course, could lead to spiraling inflationary expectations more generally.

Ironically, it might now be in the government's interest to include the higher health costs in the January data. According to Juan Francisco Foa, an analyst at BBVA in Buenos Aires, their exclusion now would be "a very bad sign."

It may be that the INDEC reshuffle has more to do with President Nestor Kirchner's ongoing efforts to deepen his control in all corners of the government than it does with the health care costs dispute.

"I get the impression that this goes far beyond this," said Javier Alvaredo, economist at consulting firm MVA-Macroeconomia in Buenos Aires. "None of this trouble seems worth it, just for a couple of decimal points in the index."

In the end, these events may get lost in the short memories of a global bond market that's still pumped with liquidity.

In this environment, with sovereign borrowers easily raising money in their own jurisdictions, bondholders' have little legal protection from data manipulation, said Abigail McKenna, a fund manager at Morgan Stanley Investment Management.

"The contract is written the way it is, and if the government decides to change the index, well, you've got a new bond," said McKenna. She said indexed bonds are never backed by strict rules on how the underlying data is calculated.

Ultimately, it's up to investors themselves to decide and, as Michael Conelius, a fund manager at T. Rowe Price, noted, "in a bullish environment, people tend to look through a lot of things." And he was comforted by the thought that the Kirchner government, out of fear of an election-year backlash, will be reluctant to fiddle with the data.

Still, Conelius concedes that data credibility has long been a concern in Argentina, especially in relation to its popular gross domestic product-linked warrants, which are "always somewhat beholden to the government's calculation of GDP." With those, he said, "the difference between 3% growth and 2.99% can be the difference between being in the money or out of the money."

Meanwhile, people like Joydeep Mukherji, sovereign analyst at Standard & Poor's Ratings, say the latest incident should be a reminder of Argentina's inherent risks. It vindicates S&P's refusal to raise Argentina's rating from a speculative-grade single-B-plus, he said, even as yield spreads have reached record lows.

"Argentina is the richest country to have such a low rating," Mukherji said, citing such indicators as literacy levels and health statistics. "But it has an institutional structure that is considerably weaker than other countries with similar levels of development."