Before the Elections and despite Bank of Mexico’s “monetary shock.”
Inflation is a touchy topic in Mexico where wages are tight and not growing fast enough. Inflation is spiking. And consumers, trying stretch ever further just to keep up, are not happy.
Consumer prices, as measured by the national consumer price index, soared 6.44% in July compared to a year ago, according to Mexico’s statistics agency INEGI. It was the sharpest annual inflation rate increase since December 2008, sharper than economists had forecast. It has now accelerated for the thirteenth month in a row. And it’s very much unwanted by regular Mexicans:
The spike in inflation at the beginning of the year was to some extent due to a jump in gasoline prices brought on by deregulation of the gasoline market on January 1. At the time, some politicians in the opposition Democratic Revolution Party called on Mexicans to stage a “peaceful revolution” against the price increases. It triggered a series of protests, and road blockages snarled traffic for days. But those gasoline prices didn’t come back down. On the contrary.
Fuel prices had been set by the government. Those prices were heavily subsidized. This was possible since the government owned the state oil company, Pemex, which has been embroiled in a slew of corruption scandals, and which got hit hard by the collapse in oil prices.
So Mexicans experienced something peculiar: While gasoline prices in the US and many other countries had plunged and remained low as a result of the oil bust, Mexicans experienced a similar plunge as result of the oil bust and then a sudden and powerful surge that started at the beginning of the year. Even as the price of crude oil fell 9% (WTI) over the past seven months, gasoline prices in Mexico surged 32% (via Trading Economics):
The fuel-price surge was expected to calm down by now, but it hasn’t quite yet. And in July, food added to the ticket: prices of fruits and vegetables soared 22% year-over-year.
The whole thing was an unpleasant surprise for the government, which had been pronouncing the end of the surge in inflation – prematurely each time. Presidential elections are coming up next year, and this surge in inflation is very inconvenient.
Finance Minister Jose Antonio Meade, when he was trying to explain the phenomenon to reporters in Mexico City, said that this time, it was the fault of tomatoes.
Excluding the surge in tomato prices, the inflation index would have been 30 basis points lower, he said. So around 6.1%. That would still be more than double the rate of inflation a year ago! Even without those dang tomatoes.
And it gets more complicated for the government. The core inflation rate – without some volatile food and energy prices – surged nearly 5% year-over-year. Just blaming tomatoes and gasoline doesn’t quite explain the story. But as always, there’s hope that this will go away, and not turn into something like the inflation debacle in Argentina.
“In general terms, we still think that the inflation trajectory will be decreasing,” he said. This has been the song and dance for a while.
And there’s more: This surge in inflation occurred despite the breath-taking recovery of the beaten-down peso. The peso had fallen to a record low of 22 pesos to the dollar on January 19, thus making imports more expensive, which would have explained part of the inflation spike early in the year. But since then, the peso has skyrocketed. It’s up 22% against the dollar in seven months. At 17.9 pesos to the dollar currently, it’s back where it had been in May 2016. And thus the peso should have disappeared as a factor in year-over-year inflation.
The hope is that the surge of the peso is going curtail inflation, Finance Minister Meade told reporters – there being a lot of hopes involved these days in economic policy.
There’s an even bigger hope: that the surge of the peso is going to last, which, given the peso’s long history of just relentlessly zigzagging lower in fits and starts against the dollar, is not exactly a sure bet.
To counteract these inflation pressures and to prop up the peso, the Bank of Mexico jacked up its policy rate from 3.0% at the end of 2016 to 7.0% now. A real “monetary shock.” The central bank will release its next interest rate decision on Thursday. It is widely expected to maintain it at 7.0%. Which is a stunningly high rate in this world of near-zero or below-zero policy rates. But when inflation takes off, that’s the kind of bitter medicine to be expected.
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Late one tonight, eh?
That said, with all the previous column inches on the “deperate search for yield”
Does 7 percent and a rebounding peso make Mex govt bonds the hottest deal of the year?
Or does thinking one could make a killing in Mexico without getting killed still certify one as bonkers in the rest of the world?
I do follow the Don, ya know.
Which reminds me, he’s not addressed Mexico in awhile.
Do you tell DQ to lay off because you’re writing one?
Legend has it that writers have insane egos.
Don’s got one on the way .. on bonds :-)
It’s the Avocados I tell ya Ban all guacamole in Chipotles and inflation in Mexico will plummet
Get ready for a repeat of the 2007 “tortilla riots.” The poor in Mexico – some 40% are officially below the government’s own poverty line – are already living a hardscrabble existence, with very little margin for further belt-tightening. If they continue to see their already dire straits exacerbated by rising food costs, there is a real risk of a social explosion. Empty stomachs also make for a fertile cartel recruitment ground.
My advice to them is get some Silver and Gold The metals are finally catching a bid with all this talk of nuking one another between Kim Jung Un and our Donald
The Price of Silver and Gold are based on the USD/JPY…This entire market is based on USD/JPY.
Frederick
Let’s see – gold down >30% (in USD) in the last 6 years. Yup, great investment advice for poor Mexicans. IFTHEY COULD AFFORD GOLD, THEY PROBABLY ARE NOT POOR!
Jesse. Snowflake investment advice…
Golds certainly NOT down in Peso terms and they can buy grams not kilos or silver It may look like a poor investment to you now but if you have alittle patience that will soon be richly rewarded
Poor Mexico. Such a great trading partner (NAFTA) but it’s obviously the most corrupt government in the WORLD but let’s keep thinking that they are trying to fight the drug cartels and protect their innocent citizens.
mvojy
Mexico “most corrupt government in the WORLD” – and you know this because?
Actually,Mexico barely makes the Top 100 most corrupt countries at number 91 (link: http://www.ranker.com/list/the-most-corrupt-countries-in-the-world/info-lists)
Read this link to the murdered missing Mexican student teachers and tell us this is not one of the most unimaginably corrupt places on earth (and on top of it all, the students had made a deal with the devil: to get their job-for-life, they had to perform an annual ritual involving hijacking buses): http://www.bbc.com/news/world-latin-america-35539727
Not saying Mexico is Garden of Eden. As bad as it is, 90 other places qualify as worse (out of about 220 total global nations).
Well, because if you pay the list maintainer, you get a better rating? :)
no doubt mexico is corrupt but MOST corrupt? no way…
I watch some of the home buying shows on tv, maybe all the Americans overpaying for properties in Mexico are causing some of the inflation.
Hey in Dollar terms they think they’re getting a steal with the peso being so beaten up
Many of the favorite coastal areas in Mexico price their real estate in dollars! A lady friend just paid US$450,000 for a large house in San Carlos with ocean view. Million+ US$ homes and condos in Puerta Vallarta are a dime a dozen, so to speak. Mexican real estate is no bargain, on the coasts, and bad value if one considers the cartel crime.
Petunia
Every now now and then, one of them there nasty land disputes breaks out (technically called a disputed ejido) and lots of American retiree homes are, what you call, “confiscated”.
Not sure how this fits into home inflation.
Overall, you’re probably correct.
Jump in gasoline prices despite lowest oil prices in years, wow.
Don’t complain I’m paying almost 6 USD a gallon here in Turkey for premium
Mean Chicken
Jump in perviously SUBSIDIZED gasoline prices even while MARKET RATE prices are lowest oil prices in years,
There. Fixed it for you.
Regardless, too big to fail needs a new crisis b/c the one they began carefully fabricating four decades ago and finally triggered circa 2008 is getting very long in the tooth.
Practice makes perfect, they’re getting much better at fabricating them quicker.
Mexico has recently turned into a net energy importer. Fall in the relative value of their fx rate will continue unlesss Mexico finds other exports where it has a competitive advantage. Inflation is a consequence. On the bright side the US dollar has been falling as well which would otherwise make their predicament worse.
Silver might just be They’re savior when TSHTF Paging Senor Price
Ole. They dig nearly a quarter of the world supply out of the ground, and you would think at some point they would demand being paid
in something that is a store of value. Hugo Salinas Price, who made a fortune as a retailer, does not begrudge the idea of paying workers in silver, and has been beating the drums for a return to honest money here and in Mexico: http://www.gold-eagle.com/article/how-i-became-gold-bug
Ravi
One thing I’ve enjoyed for about 30 years is marlin fishing (calm down – only do catch-and-release) in Cabo San Lucas.
Cabo used to be a little tiny town of about 2000 (before the condo & cruise ship boom).
Recent cartel machine-gun killing on public beaches while 18-19 year-old Mexican soldiers “patrol” the beach with loaded M16s has probably convinced me to do my fishing in Hawaii.
And you think you are doing the poor fish a favor by “catch-and-release?” I don’t really get it; how do people like it if I pushed a hook in their mouth and hanged them from the ceiling. The lack of compassion in human race is just amazing. The same goes for boiling a poor lobster just so that we can eat it. How do people like it if I boil them in hot water and a tasty sauce?? I never eat lobster even if they gave it to me for free.
When the immigration channel shrunk (before Trump) the farmers shifted agriculture back home, and so at least in my place, most of the produce comes from Mexico. Depending on the PESO, which you might expect to improve, that inflation ships to the US. With the dollar weakening it might be time to plant a garden.
You’re expecting the peso to IMPROVE?
Chip If you can’t see the writing on the wall in regard to the demise of the dollar then I don’t know how to help you so yes I expect the Peso and all currencies to appreciate versus the dollar in the medium to long term Especially Gold and Silver
Massive QE; no inflation (as measured by central bandits). No QE (Mexico); plenty of inflation. See the pattern?
Best part is how much of their nation’s debt is denominated in foreign currencies so their debt service payments rise as their exchange rate falls
Blame tomatoes?! Why didn’t I think of that! Next time I get pulled over for speeding it’ll be “Sorry officer, I slid on some squashed tomatoes.”
I’ve got some old moldy tomatoes that I’d love to throw at a lineup of people like Wasserman Schultz and the Clintons Oh and let’s not forget Maxine Waters and Donna Brazile
In Argentina, no matter how good or bad the economy goes, oil prices almost always rise at least two times a year since decades ago. So this going in Mexico doesn’t surprise me.
I wrote about this on macro man a while back, take a look!
http://macro-man.blogspot.com/2017/06/what-i-think-about-when-thinking-about.html
I just ran the numbers and I think the YoY incidence of the spike in tomato prices is higher than 30bps, just looking at two sub-categories I think it is over 50bps. And there are a number of shocks that are going to roll off out of the data next year, especially the gas price hike.
In a broader sense, the changes in the local gasoline market are a big positive for the country. New competitors are now able to compete with Pemex, and prices increased–but are also now free floating–so they should look more like international (or really, US) prices in the future.
Right now a gallon of gas costs on average something like 60 pesos, or $3.30, so roughly $1 more relative to the average price in Houston. As the market becomes more competitive, that spread will tighten.
Shawn
US fuel taxes distort that.
Best I could find on the net is Mexico puts a 12 cent/gallon tax on gasoline;
US puts 18 cent federal tax plus state tax (12 to 50 cents) per gallon; ie USA tax/gallon is 3-5 times higher.
Chip–taxes do make it tricky, especially in Mexico where historically they prices has been set by the government rather than the market with a tax on top. Since most gasoline is imported from the US, US prices are a good proxy, and while taxes do cloud the comparison they are relatively static in the US. My point is the spread to US prices is large, and competitive forces mean it more likely to come down than grow bigger.
I’ve read a few articles claiming a reduction in illegal immigration to the US since Trump. If true, I would assume this would result in reduced remittances from the US and as a result disinflationary. Is there some mechanism where this could increase inflation?
Yes sure Higher wage rates when employers can’t find enough illegals to work for slave wages but somehow I’m not holding my breath
Bob–the offset there would be fewer dollars being sold to buy pesos when the money is sent back to Mama. However the order of magnitude on the dollar and domestic demand side is small–remittances are around $26 billion per year in a trillion dollar gdp economy. While ~2.5%/gdp is a decent chunk, the annual delta on that number is small unless Trump really did something nuts like a remittances tax. But even that has a natural stabilizer because migrants send more money home when the peso depreciates, because they get more pesos for their money. Bottom line, the vast majority of $$ comes from Mexicans that have been here for years, rather than the marginal one crossing the border.