Inflation suddenly takes off.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“Green gold.” That’s the new name Mexicans have given to avocado, one of the country’s staple foods and most important agricultural exports. Unlike real gold, the price of green gold is soaring, having more than doubled in the last year alone, to reach an average price of 71.4 pesos ($3.85) in Mexico City, according to data from Mexico’s National Institute of Statistics and Geography (Inegi).
Avocado prices are soaring for a whole variety of reasons, including rising global demand. Mexico is the world’s biggest exporter of avocado, accounting for just under half of the global market. And that market is growing by the day, particularly in the U.S., Europe, and China. But there’s another reason why the price of green gold is rising in Mexico, and it’s much closer to home: inflation.
After decades of trying to tame the tempest of rising prices, with a reasonable degree of success, Mexico’s inflation rate soared to 6.17% in May, as measured by the INPC, the CPI version used by Inegi. It was fueled largely by the rising cost of food and energy after the government hiked gasoline prices by almost one-fifth at the beginning of the year. It’s the highest inflation rate since April 2009 and over double the Bank of Mexico’s benchmark rate of 3%.
But it’s the pace of change that is most disconcerting: this time last year inflation seemed “contained,” at 2.6%.
That was before the Mexican peso felt the full brunt of the Trump effect. From August 16, 2016, to January 18, 2017, the peso shed 18% of its value against the dollar, to an all-time low of 22.22 pesos to the US dollar. Since then, the peso has gained the most against the greenback of any major currency, bouncing back to 18.5 pesos to the dollar.
But prices keep rising, even as the Bank of Mexico throws everything it can at the problem. It has hiked its policy rate repeatedly. Today it stands at 6.75%, compared to just 2.5% early last year. This surge in borrowing costs is meant to help address the challenge of anchoring mid- and long-term inflation expectations, but it could also end up choking internal consumption and investment.
The current inflation rate is still far below the levels seen in the midst of the so-called Tequila Crisis in the mid-1990s, when inflation reached 50% as the newly free-floating peso tumbled against the dollar. The savings of much of the country’s middle class was wiped out. Those who had the foresight or sheer fortune to have the bulk of their savings or investments in dollars made a killing. Those who had no savings at all saw the purchasing power of their income plummet as taxes and fuel prices were hiked.
During Mexico’s Lost Decade, the 1980s, the fierce hangover from the Latin American debt crisis, coupled with a surging dollar, pushed inflation to an all time peak of 180%. That was in 1988. It took years to bring inflation under some semblance of control. But the damage had already been done. From 1974 to 2017 the average rate of inflation in Mexico has been over 25%.
Now the specter of inflation is once again rising, and with it the prospect of widespread social protest: a taste of which Mexico already had at the beginning of this year in the wake of the gasolinazo.
To calm the waters, some politicians have begun to call for a semi-commensurate rise in the lowest wages. Miguel Ángel Mancera, the chief of government of Mexico City, just called for a short-term hike of the country’s minimum daily wage to 92 pesos ($4.97), with a view to raising it in the medium term to 120 pesos (just over $6). But if inflation continues to surge, these kinds of wage increases are unlikely to go very far, especially with basic food staples and gasoline on which Mexicans spend a disproportionately big part of their incomes. By Don Quijones.
Gasoline theft is the second most profitable activity for Mexico’s crime gangs, now that gasoline prices have soared. With consequences. Read… The Pillage of Pemex Turns Bloody
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Why is a lifting of price controls on fuel considered “inflation”? It’s nothing of the kind.
Inflation is a rise in prices for whatever reason.
What’s happening to American exports in this situation? I can’t see them stay steady. When the Pesos fell against the Dollar, was there a spike in Mexican exports?
Am grateful for this article!.
mexico ( as a result of NAFTA) now purchases much of its corn from the good old US which has now become very expensive due to the currency exchange rate .
http://money.cnn.com/2017/02/09/news/economy/nafta-farming-mexico-us-corn-jobs/index.html
Hass ‘green gold’ in the supermarkets here: 2 for A$5.00.
Better walk and not take the car to the store as gasoline had one of its price jumps on Friday from A$1.18 a liter to A$1.399 a liter.
But I thought Oz grew its own avos, Lee? Used to pass plenty of avo farms in the Qld hinterland.
Yeah, but the demand for the fruit has pushed up prices here as well. You know all those young things that think it is the greatest fruit in the world.
Lamb, avos, beef, fish – all have all gone up way in price along with electricity.
It is cheaper to buy bananas in Japan than in Australia! Avos – I’ll have to check on the price…..
I love ‘Strine: mozzies, bushwalk, roos and roo bars, stubbies, big bickies… and now avos. Learn something new every day :-)
Almost cheaper to buy real gold in Thailand than the green variety. Someone could make a killing farming them here, the climate is right.
Mexico and the US would be better off integrated as one country. Mexico is the demographic future of the US. It is pretty obvious in the California public schools. They have resources and population growth. Someone must be making money off the separation of the two countries.
No, I think just California should once again become part of Mexico. They’re conveniently attached to it and have, as a result of that and other factors, similar political views. For instance, gun laws are -VERY- strict in Mexico. Please ignore their total ineffectiveness to stop the rampant violence there by bad guys with guns who, surprise, surprise, don’t pay any attention to laws.
On integrating hell holes OF THEIR OWN CREATION that people clamor to leave and illegally move into the US… um, not a good idea.
Excuse this moment of political fact check time .. but in case this FACT has escaped you the number of immigrants both legal and illegal from Mexico has been in a steep decline since 2008 . . so much for them ‘clamoring ‘ to our ” Broken Promise Land ”
Another fact . As the number of ‘ Hispanic ‘ immigrants [ remembering a good 70% of what you no doubt consider ‘ Mexican ‘ are in fact Central and South Americans ] has rapidly declined … the number of immigrants both legal and illegal coming from Asia and India .. is on the ascent . With S Korea now becoming the leading source of illegal immigrants to the US ( USCIS ICE )
Damn .. if only you’d read the real facts , news and statistics .. rather than the alternative version(s) feeding your xenophobia and bigotry
PS; Pardon the rant Wolf … but this one needed to be addressed
Just to add to it: there has been a net out-migration of Mexicans from the US over the past few years. In others words, more are returning to Mexico than are arriving in the US.
How about facts from ICE:
“The leading countries of origin for removals were Mexico, Guatemala, Honduras, and El Salvador. (2016)” Source: ICE 2016 report
Korea isn’t even mentioned.
I find it hard to believe that over 100,000 Koreans are subject to detention and removals per year in the USA.
Winston – Guns laws in California are about the same as anywhere. The competitive shooting scene here is such that if you’re the California state champion, there’s a pretty good chance you’re National champion, across a huge number of fields from high-power rifle to ISPC. Gun shops abound; there’s one about a mile from me, and more scattered all over. Gun sales and ammo sales etc are thriving and always have. In the past 10 or so years I’ve seen things only improve – as they have all over the country – with concealed carry a real thing here, sure not applicable in a few pockets like Berkeley and SF, but a real thing in 99% of the state. The California Rifle and Pistol association, our state organization, used to put out a small 4-page black and white newsletter but now they put out a magazine that’s 24 pages or so in color. We’re home to Kim Rhode, many-time Olympic gold medalist, and have produced, and continue to produce, champion shooters.
It’s always cracked me up, being outside California and hearing all this stuff about how all the guns area gone yadda yadda and then when I get back here, things are just fine.
We have strict laws regarding who can get “welfare” who can vote, etc. It’s a hell of a lot harder to get Food Stamps here than in flyover country.
Now, if there’s a place that ought to become part of Mexico, it’s Texas. It’s part of flyover country, making it much more akin to Mexico than the real, coastal, US. It’s right next door to Mexico, making assimilation easy. And they both have X in the name. I mean, who can tell the difference anyway?
Couple of minor things: Texas is part of the “coastal US” too (Gulf Coast). And Texas is so huge that part of it is proudly flyover country and part of it belongs to big-city urban America. The Dallas-Fort Worth and Houston metros are among the largest in the US. And next time you go to “South by Southwest,” check out Austin while there.
I’ve heard of “south by southwest” it’s one of those trust-funder rave-up concert things I could not afford to go to in a million years even if I wanted to – and I don’t.
I can barely afford to go to things here in my own town.
I know Texas isn’t totally “flyover” after all, they have to have people with 3-digit IQ’s to do the oil stuff, the cyber, etc. And Austin is trying to be “less Texas” – lots of luck to ’em considering so many of their idiotic laws are state level. I was just razzing Winston. Wherever he lives (somewhere in flyoverstan I’m sure) would be improved by assimilating with Mexico so I’m doing him a favor by putting an idea in his head to ponder. Uhh, that means “think about”.
Lol, when you took that new 13 round mag you bought in Texas for your Glock back home with you, were things still just fine?
One has to wonder exactly at how bad the real situation must be on the ground as everybody buying groceries knows very well “real life” inflation tends to be considerably higher than official figures, especially for those goods and services which tend to be dramatically underreported (or even ignored) in CPI calculations, such as fresh vegetables.
I’ve read the automotive component factories around Guanajuato are really struggling to find labor because they all offer about the same basic wage (around 120 pesos/hour) which allowed a modest living until early 2016 but these days is simply not enough anymore.
Inflation is really biting in the area and people do not move there anymore because wages are not keeping up with ever-increasing costs of living.
The solution for the auto component factories should be obvious. Either move the factories to Guatemala and Honduras or bring Guatemalans and Hondurans into Mexico to provide the labor.
You say that in jest but Mexico does have a very serious illegal immigration problem from further south, so much some local politicians advocated building a Trump-style wall on the borders with Belize and Guatemala. Should help Cementos Moctezuma stocks…
MC that’s one and a half avocados per hour Pretty poor wage for factory work actually No wonder they can’t find help
Mexico has a mouthwatering inflation for the central bandits in Europe and NA. Maybe they should gather next time in Yucatan instead of Jackson Hole to witness first hand the wonders of soaring inflation. Or is Mexico just behind in the method of calculation the inflation?
Mexico’s central bank is a model of fiscal prudence and restraint compared to the Keynesian fraudsters and “former” Goldmanites at the Fed, ECB, UK, and Canadian central banks.
Unfortunately for the Mexicans, this is not true. Go to stock charts.com, type in $MXNUSD (The Mexican Peso to USD Index), and discover that it is down nearly 50% since 2008 (and this despite a substantial gain in 2017).
Other than the increase in fuel prices, what are the other drivers of inflation? If, at its core, the driver is increased fuel prices, then inflation should stabilize if this is a one-time event.
Housing, food, tuition, utilities etc etc But that’s just a guess lol
Most likely plunging exchange rate of the peso. The same as in Canada, only in Canada, the bureaucrats figured out how to report consumer inflation. Mexico still behind.
It only took fuel to produce cost-push inflation in the U.S. The states’ peak oil moment (1971) followed by the OPEC guys pissed at the Yom Kippur war never impacted more than 3% of the supply, nevertheless, prices rose from $1.75/bbl in 1971 to $42/bbl in 1982 (about where they are now, adjusted for inflation). Meanwhile inflation hit as much as 12% per year in other areas (houses for one!).
The cartels are extorting virtually all productive enterprises in Mexico, especially the lime and avocado growers. State and municipal police are usually in league with the narcos and enable them to prey on the populace and business class with impunity. This adds to producer costs and is passed on to consumers.
As if Mexico does not have enough problems and poverty, Trump wants to squeeze more life out of them. If you have a continent full of desperate neighbours, then you better be able to lock your garage and buff up your security systems, (if you can afford it). Raising the backyard fence isn’t much of an option, is it?
When inequality rises, so does unrest and the threat of upheavel. Plus, there is always the looming spectre of ‘unintended consequences’.
Just ask Europe about desperate migrants. All the guards and police cannot stop it from unfolding.
When you visit Mexico, and I don’t mean the all-inclusive resorts and gringo housing compounds, you quckly see just how hard-working and enterprising people are as they go about their survival. Compare that to the declining regions of the US.
My own feeling is that when the US dollar loses its reserve currency status, and one day it will be overtaken by a basket of currencies, it will no longer be possible suck the life out of other people. Not that the fortunes of Mexico will rise, but the Us will sink closer to the same level.
We’re all in this together. Drastic inequality is not a winning strategy for very long.
I’m attributing the global demand for avocados to the growth of Chipolte. They charge $2 extra to add avocado to any dish. The margins for them must be good because the portion is very small, maybe one or two tablespoons. That extra $2 can be 20% to 30% more on the price of the dish.
Not everything Avocado related is due to Chipotle They are expensive here on the Turkish coast too Thankfully my neighbor has two huge trees full of them and gives me a basket full when in season We eat what’s in season here and we eat very well and inexpensively although food inflation is very high I’m buying a piece of agriland just for raising my own veggies fruits and livestock Self sufficiency is the big thing today for good reason
Terrible Mr. Quijones…the big 3 energy kleptocracies south of the border — Venezuela, the struggling Brazilian democracy & Mejico — all struggling mightily.
It’s a brilliant example of the Dutch paradox, no?
Best…PJS
uncovered a relevant narrative via the WR archives . might explain the high inflation . it certainly exemplifies how susceptible EM markets are to currency valuations.
http://wolfstreet.com/2015/08/08/corporate-dollar-debt-explodes-in-mexico-as-peso-dives/