More consumption
Other local factors are putting pressure on price increases in the country, such as the strength of the workforce and consumption, which has grown steadily in recent months driven by the arrival of remittances to the country, say the specialists consulted.
Gabriel Casillas, chief economist for Latin America at Barclays, explains that the wage bill in the country has grown above general inflation. This factor, plus a low unemployment rate, causes consumers to make purchases and does not fulfill the economic theory that in an environment of high rates, prices will fall.
On the wage side, adds Carlos Capistrán, chief economist of Bank of America in Mexico, the increase in the minimum wage has caused a “rigidity” for inflation in services to slow down, since companies and businesses transfer the expense of salaries to the products or services they offer.
Casillas also highlights the increase in constant consumption due to the remittances that the country receives, which already represent close to 4% of the gross domestic product, when in 2017 it was 2%.
Banxico’s task
Polidura maintains that the central bank has done everything possible to contain inflation, but external and internal factors show that it is ineffective in its mandate. “It has done everything possible to counteract inflation with the high rates that it has tried to maintain, but, evidently, there are issues that Banco de México cannot influence or control,” he adds. In this latest inflationary wave, geopolitical conflicts, such as the one in the Middle East, pushed up oil prices, which was seen in the price of energy.
Capistrán does not share the good opinion of Banxico’s work and highlights that, after its decision to lower the reference interest rate to 10.75% from 11% in August, there is a risk that inflation expectations will be contaminated due to the foods, which are volatile in price.
Half solution
The government launched the Package Against Inflation and Famine (PACIC) in May 2022. Although it helped contain prices, such as energy prices, since August of last year, the Bank of Mexico stopped considering this program as one of the measures that could help contain inflation.
The discounts on fees for the Special Tax on Production and Services (IEPS) helped reduce the impact on fuels, due to the rise in crude oil in 2022, but for most of this year there have been no stimuli for Premium gasoline and to diesel. For Magna it has been minimal, while in the first two weeks of September no subsidy has been registered.
“A difficult start to the six-year term is coming. If a lack of control occurs [en el precio de los energéticos] Due to geopolitical issues that do not allow prices to be contained or lowered, it will be very difficult for the basic basket to remain affordable. In 2025 it will be difficult to have a salary adjustment that mitigates such high prices,” warns Ramsés Pech, Energy and Economy analyst at Caraiva y Asociados-León & Pech Architects.
The last hope?
Given the variants that are out of the control of the central bank, the lower dynamism of the economy appears as the factor that could lower prices. Banxico and the consensus of analysts expect that the Mexican economy will suffer a slowdown this year. Estimates point to growth of 1.5% from the 3.2% recorded in 2023.
However, Heath warns that pressures outside the central bank’s control, such as climate change and insecurity, will be “increasingly structural effects.”
“I believe that we will always be seeing an effect of this type on prices and it will increasingly be greater. I would say that we could now talk about more structural effects and not simply temporary ones. When we have problems of lack of security and extortion, which have to be fought, but there is nothing from the Bank of Mexico, because that is not up to them, we simply have to face that problem, but we cannot really solve it,” explains the deputy governor.
Meanwhile, in the markets of Santa Fe and Escandón, heads of families prowl the aisles and stalls in search of the least expensive kilo of tomato and lemon. “Speaking of the basic basket, as long as the tomato, the tomato and the chili are stable, we can say that we are safe,” says Sari Romero, one of the market traders, while she dispatches her clients.
With information from José Ávila, Luz Elena Marcos, Dainzú Patiño and Patricia Tapia.
