BUENOS AIRES, Argentina — Hernan Valdez and his girlfriend Milagros Garin are the proud owners of a new Peugot. It's a gray compact, immaculately clean, and still has that new car smell two months after they drove it home from the dealership.
A year from now, it still might smell new. Buenos Aires has a public transportation system akin to New York, so Valdez says they plan to use the car on weekends and holidays, if at all.
"It's very uncomfortable to drive in Buenos Aires — commuting to work is very crowded and there's lots of pollution," Valdez said. "Most days we plan to leave it parked and travel by subway or bus."
Argentines are buying cars in record-breaking numbers this year, but not necessarily because they're burning to drive. With currency markets uncertain and inflation expected to reach 30 percent in 2011, Argentines are trying to find places to park their savings.
"Those who can buy property, but those who can't buy cars," said Valdez, who traded in the used car he bought last year for the new Peugot. Valdez, who works as a financial analyst for an international bank, said many of his friends bought cars this year too.
Fueled by record soy and corn harvests last year as well as strong Brazilian demand for Argentine-made cars and manufactured goods, Argentina is one of Latin America's fastest growing economies. Its GDP is forecast to grow between 7 and 9 percent this year.
Yet Argentina also has Latin America's second highest inflation rate, next to Venezuela. The national statistics agency reports annual inflation at 11.1 percent, but private analysts say Argentina's actual inflation rate is closer to 26 percent and set to increase with government spending ahead of next year's presidential election.
In the past, Argentines adapted to inflation by buying American dollars, but a weakening dollar doesn't make that a secure option today. Especially since other currencies, such as the Brazilian real, have been gaining against the dollar.
With banks only providing 8 percent annual interest rates, Argentines are turning to cars as virtual savings banks. In most places in the world, a new car depreciates in value as soon as it leaves the lot, but not in Argentina.
For example, an Argentine consumer can buy a car for 50,000 pesos, use it for one year, and sell it the next year for almost the same price or more. In Europe or the United States, cars leave about 20 percent of their value when they leave the lot, said Hernan Dietrich, owner of one of Argentina's largest car dealerships.
"Here the loss is absorbed by inflation and the equation balances out," Dietrich said. "So many people have decided to buy a car if they don't have another way to save."
Chronic inflation doesn't give people incentives to save. Many reason it's better to have a car than watch their money disappear in the banks. Yet for higher income earners with access to credit, there's an added incentive to spend.
There's an added incentive to spend: You can profit against inflation. To buy his new Peugeot, Hernan Valdez took out a five-year loan with fixed payments at 16 percent, but 26 percent annual inflation takes a bite out of those payments.
"When the rate of interest is less than the rate of inflation, you're getting free money," said Carnegie Mellon University economist Lee Branstetter. Argentines who can take on debt, can buy things with real value, but the real value of the debt is shrinking over time."
When it comes to taking advantage of inflation, Argentines are taking a cue from their government.
In 2007, then-President Nestor Kirchner purged the national statistics agency and began using a formula that underestimates the official inflation rate of the country. Additionally, his wife, current President Cristina Fernandez replaced the head of the Argentine Central Bank with a government supporter last year.
Fudging official inflation helps the government twofold: First, underestimating annual inflation allows the government to spend excess revenues, often giving it a political advantage. Second, it helps Argentina pay off its creditors from its 2001 default. Argentine bonds are indexed to official inflation rates, so like Hernan Valdez, the Argentine government has been paying off debts with money that's losing value.
In a surprising about-face last month, the Argentine government officially asked the International Monetary Fund for help adjusting its inflation data. For years, Argentina had been the only G20 country to refuse to allow the IMF to review its books.
Many believe the return of the IMF may be part of the last round of negotiations for paying off the last remaining defaulted debt.
The IMF said it expects to have its design recommendations for a new consumer price index ready by April. Yet most do not expect the government to adopt them any time soon. If Argentina acknowledges its real rate of inflation is much greater than its official rate of inflation, that could result in legal problems with bond holders.
Moreover reining in inflation would likely mean a nasty recession, and that's not likely to happen with a presidential election in 2011.
The government is more likely to stoke inflation, with increased spending on public works and wage increases to union supporters, according to private financial analysts as well as a survey of Argentines on inflation. With the Central Bank headed by a Kirchner supporter, the government can expand the country's money supply as it likes.
The Carnegie Melon economist Branstetter likens Argentina's addiction to inflationary spending to watching a relative with extraordinary potential fall prey to alcoholism again and again.
As one of the world's top grain producers, Argentina has every reason to become a successful player in the global economy. Yet chronic inflation, and sometimes hyperinflation, has dogged the Argentine economy over and over since the 1950s. The inflationary spending is great in the short-term, but undermines the basic foundation of financial system and long-term growth.
As Argentines spend more to save more, it stokes even more inflation. Valdez said people who can't buy cars are buying flat screen televisions or mobile phones.
"This has to end sometime," he said. "You can buy one flat television, maybe two, but you don't really need them. I'm not going to put a flat screen television in the bathroom."