“There is no measure that can withstand galloping pressure from abroad. So it is a good measure to anchor expectations (of inflation). The price of gasoline has worked at the cost of eroding the budget a little, but if the pressures continue from outside, the businessmen they are going to have to break ranks and start raising prices,” said Luis Gonzali, Vice President and Director of Investments at Franklin Templeton Mexico.
The plan that the federal government presented this Wednesday contemplates working on 4 measures: production, distribution, foreign trade and other measures to maintain food prices.
Inflation coming from abroad
The inflation faced by the world’s economies, including Mexico, is mainly caused by the war between Russia and Ukraine, two countries that supply other nations with grains such as wheat and fertilizers.
Faced with this conflict, countries have had to look for food supply alternatives, commented Janneth Quiroz, deputy director of Economic Analysis at Monex. “Faced with the shock in supply due to the paralysis of production and due to these sanctions that have been implemented against Russia, there is no regular international trade,” she said.
The plan to increase food production in the country, although good, will take more than six months to take effect, which is the first term that the government has set as a goal. And it is that the process of cultivating, harvesting and distributing is not easy. For the economists consulted, this package against inflation will be for the medium term and the benefits could be reflected for up to six months.
“There is talk of an agreement that will last six months initially and is relatively short compared to the time it takes to prepare an area to plant, harvest, all these are processes that take more than six months. Even if the measures worked perfectly, they are not going to have an effect on prices in the short term, the measures that increase production are not going to have an effect for three or six months,” explained Felipe Hernández, economist for Latin America at Bloomberg Economics.
Although the government has also promised to deliver fertilizers to improve crops in nine states, the positive effects will not be seen for several months.
The effects that can be seen in the short term are the incentives to the IEPS for fuels, which have already been applied for several months. In order for inflation not to hit the pockets of Mexicans, the government has given incentives to gasoline and diesel, which means that they no longer receive IEPS money.
“On the gasoline side, it is helping, it is taking away our budget, that is, we are stopping collecting IEPS and the government’s fiscal position is deteriorating, but it is helping to control inflation,” Gonzali said.
If the federal government’s plan does not work, either because the conflict between Russia and Ukraine worsens or because the COVID-19 pandemic takes a new course of more infections, especially in China, prices will continue to rise and the Bank of Mexico will have to continue with his cycle of rate hikes, an issue the president has said he doesn’t want because it slows economic growth.
