Freeze! How Not to Beat Inflation, Argentina Style

NEW YORK ( TheStreet) -- The most interesting headline I saw yesterday had nothing to do with Dell Computer ( DELL), and when a deal might get done/at what price; or with yesterday's market pullback. Instead, it was concerning Argentina's efforts to "break" inflation.

Yup, they have found the solution to rising food prices: price controls. The solution works like this: simply mandate that the prices on supermarket products cannot be increased for the next two months. These price controls will evidently apply to every single product in the Argentina's largest supermarkets, which includes Wal-Mart ( WMT).

Historically, the country has had bouts of massive inflation; with some economists predicting it could be as high as 30% this year alone. That's not a good environment for consumers trying to put food on the table.

Evidently Argentina is attempting to quell consumer's fears of inflation with this move. Unfortunately, there are consequences that often accompany such price controls: shortages. If you attempt to artificially hold prices down, there will be scarcities, and perhaps a thriving black market.

The country's move to freeze prices comes on the heels of a censure from the International Monetary Fund for releasing inaccurate economic data. The country has a September deadline in order to bring its economic statistics to international standards; otherwise it may be expelled from the IMF.

For years, Argentina has had a reputation for inaccurately reporting inflation data, via the omission of decimals in monthly in inflation rates, for one. More telling has been the country's statistics institute INDEC's practice of removing products that have had sharp price increases, from inclusion in the consumer price index calculation. According to State Street's PriceStats Index, the "unofficial" inflation rate, as measured by CPI, can sometimes be twice what INDEC has reported.

As an investor, it gives me greater pause to deploy capital in Argentina. Last April, the Argentine government seized control of YPF, the nation's largest oil and gas company, from Spain's Repsol. Due to concerns of how far the that government might go in terms of seizing control of other industries, it helped send shares of Argentine farming giant Cresud Sociedad An ( CRESY) a name I've owned previously, from $13 in late March to $7 in June. Given Cresud's incredible package of assets, that move appeared to be an over-reaction. Since then, Cresud regained more than 35%, but is still 50% below where it traded in April. CRESY Chart CRESY data by YCharts

Cresud is certainly a name that I want to own again, but I'm not sure how the latest moves by the Argentine government might affect the stock. There's been little, if any reaction so far. I'm just hesitant to purchase an agriculture name in a country that is attempting to artificially control food prices; at least not without a large margin of safety.

I don't believe any good will come of Argentina's latest attempt to "control" inflation.

We've tried it here; President Nixon imposed wage and price controls in 1971 to combat inflation. It was a failure of epic proportions.

Stay tuned.

At the time of publication the author is long Dell.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.