The focus on using real-life examples in lessons is one of the reasons why Economics is such a popular subject and this skill is vital for those students aiming for an A-grade. So the news last month that Inflation was at 25.4% provided the perfect case study for our A-Level Economists in preparation for their final exam last week.
Inflation in Argentina has been much higher in the past. For the 15 years from 1975 to 1990, the annual rate averaged a remarkable 300%, meaning that the price level doubled every few months, on average. Prices rose at an explosive annual rate of more than 1,000% in 1989.
As with the UK's weak pound, a collapse in the currency is the main cause of the current high rates. At present is hovering at around 23 pesos to the dollar. That is an all-time low for the peso and a worrying sign of its devaluation. The peso has suffered with foreign investors moving their money from emerging (frontier) market currencies into the dollar to benefit from the recent rate rises by the US Federal Reserve. The appetite for risky assets in South America has fallen dramatically. This withdrawal starts "herd behaviour" as in recent days, nervous Argentinians have also been cashing in their pesos for dollars.
Argentina's central bank has responded with three surprise rate hikes since mid-April, raising the key rate to the highest in the world at 40%
To counter this collapse the Argentine central bank has responded with three surprise rate hikes since mid-April, raising the key rate to the highest in the world at 40%. As a result of this outflow of funds, investment in Argentina is low, holding down productivity and growth.
Argentina’s experience holds two crucial lessons for our Economics students. First, price stability is fragile, and the inflation rate can rise rapidly. And, second, high rates of inflation remain in the public’s memory and have long-lasting adverse effects.This Argentina case study was a challenging one, with several students having to refresh their earlier knowledge to fully understand all the implications. Through using a real-life example that they could relate to though many found this made the concept more applicable. The students may even have been lucky enough to have this scenario set in their actual exam!