The sky’s the limit: The economics of inflation and hyperinflation

8 Conclusion

We started this Insight with the case of Argentina in 2023. At the time, some people feared that the economy was heading towards another hyperinflation episode. The presidential candidate Javier Milei was promising to dollarize the economy if he won. Each time a poll came out in his favour, the price of the dollar jumped, exacerbating the depreciation–inflation spiral. At the end of 2023 he won the election, but he did not fulfil his promise to dollarize. Instead, he implemented a far more conventional plan of austerity, with very large cuts to government spending. This caused aggregate demand to collapse, creating a deep recession and rising poverty that reduced inflation, as predicted by the Phillips curve model.

However, the government was well aware of the additional dangers of the depreciation–inflation spiral. For this reason they maintained currency controls to make it difficult to buy dollars, and created tax incentives for Argentines to put their dollar savings in the banking system so that they would contribute to central bank reserves.

At the time this Insight was written (mid-2025), inflation had fallen to just above 2% per month, the exchange rate had stabilized, and the economy had begun to recover. So far, the combination of reduced aggregate demand and a stable exchange rate have successfully reined in inflation—albeit at a moderately high level that implies around 30% annually. There is still some way to go to bring it down to single digits. And the primary reason to be concerned about the plan’s sustainability is that, after months of a stable exchange rate with inflation over 2% per month, the real exchange rate is overvalued, reducing net exports. A new IMF loan added to reserves, but the overvaluation means that these reserves are at risk of being spent as the overvaluation leads to a current account deficit. The dilemma is that while a depreciation would help the current account, it would also risk reigniting the depreciation–inflation spiral. Only time will tell if the programme is successful in the long run.

Controlling inflation ultimately requires managing the multiple social conflicts that are present in every economy. Workers vs firms, importers vs exporters, taxpayers vs the recipients of public expenditures, foreign creditors vs the government, all want to raise their own income or price, and reduce their own expenditure or cost. But my cost is your price, and your cost is my price. So when one economic actor raises their price or wage, whoever pays it wants to raise their own price or wage. To settle inflation, one has to settle these conflicts.