Inflation Surges as Economy Bogs Down in Mexico

Bank of Mexico caught in a vise.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In the last week, the governor of the Bank of Mexico (or Banxico), Augustin Carstens, stepped down in order to take over the reins as general manager of the Bank for International Settlements in Basil, Switzerland, while Finance Minister José Antonio Meade, handed in his resignation to run as the presidential candidate for the governing PRI party in next year’s general elections.

Despite the fact that the country’s two most senior public financial officials have left their posts within days of one another, and though the Mexican stock index is down about 9% from July, the markets still seem pretty sanguine.

But that doesn’t mean that problems are not stacking up.

Earlier this year Carstens felt compelled to postpone by five months his departure from Banxico, which was initially scheduled for May, in the hope that his continued presence would help steady investor nerves as well as tame inflation, which began soaring after the government’s one-off hike in gas prices at the beginning of this year.

It didn’t quite work out that way. Despite the Bank of Mexico’s policy rate of 7%, consumer prices in Mexico hit a higher-than-expected annual rate of 6.6% in the first two weeks of November. “Obviously, the final photo of my mandate isn’t the best,” Mr Carstens told the FT.

While inflation has surged, economic growth remains sluggish compared with many other countries, including Mexico’s direct neighbor to the north. Banxico is forecasting growth this year of 1.8% to 2.3%. But even that may end up proving to be optimistic after it was revealed this week that third-quarter gross domestic product had shrunk by 0.3% compared with the previous quarter, as manufacturing declined more than expected. It was the first quarter-to-quarter GDP contraction since Q4 2015.

“This deceleration is largely explained by a temporary and limited impact from the (recent) natural disasters,” the Finance Ministry said in a statement on Friday, citing the oil, education and tourism industries. Of course, there’s also the unmentioned fact that credit has got a lot more expensive as a result of Banxico’s contractionary monetary policy.

Now, with inflation already more than double the central bank’s 3% target, Banxico has little room to stimulate Mexico’s stuttering economy. The bank’s new governor, Alejandro Díaz de León, who was promoted from deputy governor on Wednesday, is well aware that many of the factors spurring inflationary pressure, such as seasonal fuel price rises and expansionary monetary policies in other parts of the globe, are beyond the bank’s control. There’s also the prospect of the Federal Reserve further hiking US interest rates in December, which would heap even more pressure on Mexico’s currency.

If that were to happen, Banxico would have little choice but to raise interest rates even further, which would risk further stifling an economy that has struggled to bounce back after back-to-back earthquakes in September. Fears over political instability next year as well as a possible breakdown in NAFTA renegotiations are also dampening investor sentiment.

In an interview with Bloomberg, Carstens tried to warn Mexico’s next president off trying to change Banco de Mexico’s exclusive inflation mandate. The message was clearly intended for one particular person: Andrés Manuel López Obrador (or AMLO as locals like to call him), the populist leader of the strongly leftist party Morena who came within 250,000 votes of winning the 2006 elections.

AMLO has tried to calm market jitters over the prospect of his election by promising to keep inflation and public debt low, but he’s also pledged to raise taxes and increase public spending. And that’s not what the markets want to hear. He also plans to sharply raise the minimum wage to foment consumption and the internal market, as well as improve salaries for public workers.

It’s a pledge that could prove extremely seductive in a country where real wages for many workers have not just stagnated but dropped. After 23 years of NAFTA, the average Mexican earns less in comparison with his American or Canadian counterparts than he did before the trade agreement came into effect, much to the consternation of unions in Canada and the United States.

It’s a trend that continues to worsen as time goes on. According to Mexico’s National Council for the Evaluation of Social Development (CONEVAL), an independent government organization, the percentage of the population with daily earnings lower than the basic daily food basket — just 92 pesos ($4.96) — rose from 40% to 41.8% between the third quarter of 2016 and the third quarter of 2017. This prompted calls for the government to raise the minimum wage to 92 pesos per day, to at least cover the basic daily food basket, but Banxico warned against such a drastic step, cautioning that it could add further fuel to inflation.

In the end, the government took a halfway measure, raising the minimum wage by 10% from 80 pesos ($4.20) a day to just over 88 pesos ($4.60) a day. If inflation remains high while the economy continues to stutter, economic conditions for many Mexicans, in particular those on lower incomes, are going to get even harder. And with public discontent already high, that is the last thing the government needs in an election year. By Don Quijones.

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  10 comments for “Inflation Surges as Economy Bogs Down in Mexico

  1. 2banana
    Nov 30, 2017 at 10:32 pm

    1. The FED keeps telling us inflation is good! Mostly likely for the reason that it slowly wipes out the insane government debt and obligations without “blame.” The FED must look at Mexico and are jealous.

    2. If NAFTA is so bad for Mexico – why are they fighting so hard NOT TO CHANGE IT and keep it as is?

    3. China is crushing Mexico. Massive corruption and crime is crushing Mexico. A massive and inefficient government is crushing Mexico.

    • Dec 1, 2017 at 1:35 am

      There are many groups in Mexico that have been urging the government to walk away from NAFTA.

    • Maximus Minimus
      Dec 1, 2017 at 12:00 pm

      Mr. Carstens can offer expensive seminars on how to ramp up inflation. Mexico managed to so with one hand in the pocket. The keyword is: honest measurement.

    • Saylor
      Dec 1, 2017 at 12:21 pm

      First, one should ask themselves ‘who’ is fighting [not] to change NAFTA?
      Not the small business man nor farmer.
      From what I am to understand, the large influx of illegal aliens from Mexico occurred after large corporate agricultural firms in the U.S. were able to dump cheap corn into Mexico thus putting a lot of small farmers out of business. So [the] went north due to loss of income.
      Want to know who is fighting a fight? Follow the money.

  2. Tom
    Dec 1, 2017 at 4:04 am

    Does $4.92 a day even cover a “HAPPY MEAL” in Mexico? An inquiring mind wants to know.

  3. Dec 1, 2017 at 11:34 am

    Immigration has been slowly declining, and so it seems Mexico is going to grow an economy vertically, (which is what China wants to do) but its a GOOD sign that leaders already in government are aspiring to higher offices, and a BAD sign when a wealthy faux populist aspires to steal the leadership role by appealing to the base level with promises that will never never be kept.

  4. Dec 1, 2017 at 5:09 pm

    what fuel price hikes are seasonal? Electricity prices have seasonality, but gasoline, natgas and propane prices do not. The real driver of energy inflation, and to a large extent headline inflation at large, post-gasolinazo has been the increase in propane prices, which have risen 20% *after* the big jump at the beginning of this year. Two products (propane and inter-city buses) have contributed about 12% to inflation since 2H January, with fruit, vegetables and meat contributing another third.

    All in, other than propane prices, which still have plenty of upside, on a 3m/3m rolling basis, non-core inflation looks pretty tame and food prices have started to come down. The underlying drivers of inflation aren’t breaking down and inflation will fall in 2018, if…if MXN stablizes or appreciates and tail risk factors like NAFTA and AMLO fade away. (don’t hold your breath on either, though)

  5. Ishkabibble
    Dec 2, 2017 at 1:21 pm

    Population in Mexico in 1960: 38.17 million people/”consumers”
    Population of Mexico in 2016: 127.5 million people/”consumers”
    Population increase in 56 years: 89.33 million people/”consumers”

    Percent increase of the Mexican population in 56 years:
    127.5 million / 38.17 = 3.29 x 100 = 329%

    Again, Mexico’s “consuming” population has “grown” by 329% in 56 years. (And this does NOT take into account the millions of human beings that have re-located from the area on the planet that humans agree to call “Mexico”, across an imaginary line of demarcation to the area on the planet that humans agree to call “the United States of America”.)

    But there is a “problem” for human beings living in “Mexico”. As DQ (no, not THAT DQ) has put it so well,
    ===
    “While inflation has surged, economic growth remains sluggish compared with many other countries, including Mexico’s direct neighbor to the north.”
    ===

    What?! ECONOMIC GROWTH REMAINS SLUGGISH in an area of the planet where the human population has grown by 329% in only 56 years!? How can this be?! Luckily, we have one explanation from “experts” who live in that area:
    ====
    ““This deceleration is largely explained by a temporary and limited impact from the (recent) natural disasters,” the Finance Ministry said in a statement on Friday, citing the oil, education and tourism industries. Of course, there’s also the unmentioned fact that credit has got a lot more expensive as a result of Banxico’s contractionary monetary policy.” Etcetera, etcetera, etcetera.
    ====

    But just exactly WHY is that 329% increase in the population of human “consumers” living on the area of the earth that humans call “Mexico” not mentioned by the “experts” in the “Finance Ministry”? Might that have at least SOMETHING to do with “Mexican consumers” “problems”?

    Nope, that’s got nothing to do with anything. According to a human being named Alejandro Díaz de León, “who was promoted from deputy governor on Wednesday”, problems are complicated. As DQ speculates, this man ” is well aware that many of the factors spurring inflationary pressure, such as seasonal fuel price rises and expansionary monetary policies in other parts of the globe, are beyond the bank’s control. There’s also the prospect of the Federal Reserve further hiking US interest rates in December, which would heap even more pressure on Mexico’s currency.

    “If that were to happen, Banxico would have little choice but to raise interest rates even further, which would risk further stifling an economy that has struggled to bounce back after back-to-back earthquakes in September. Fears over political instability next year as well as a possible breakdown in NAFTA renegotiations are also dampening investor sentiment.”

    Oh, NOW I understand why the human consumers living on the area of planet earth “we” have agreed to call “Mexico” are suffering a relatively, to put it succinctly, “low standard of living” compared to human consumers living on other demarcated areas of the planet that have different names.

    Quite obviously, the human consumers living on those OTHER areas of the planet MUST BE DOING SOMETHING BETTER than the human consumers living on/inside the area called Mexico. In other words, those consumers living on those other areas must be “following the world-wide, ‘globalized’ economic rules” BETTER than the consumers living within the area that humans have agreed to call Mexico.

    Quite obviously, because there is absolutely nothing wrong with the world-wide economic rules (the rules of an economic system in which the vast majority of wealth and capital is owned by a microscopic percentage of the human population), there must be something wrong with the way that the human consumers living in Mexico are BEHAVING.

    But no, the experts tell us that much of the reason for Mexicans’ low standard of living is “beyond” Mexicans’ control — for example, “seasonal fuel price rises”, “expansionary monetary policies in other parts of the globe” and “there’s also the prospect of the Federal Reserve further hiking US interest rates in December, which would heap even more pressure on Mexico’s currency.”

    The most important question that everyone reading DQ’s great article should be asking themselves is obvious. Just exactly WHY can’t the relatively low standard of living for the human consumers living on that part of planet earth we have agreed to call “Mexico” NOT be “corrected” by those same human beings to WHATEVER standard of living they desire?

    They can’t because, so far anyway, they have “decided” to fully participate (to assume a well-defined role that is decided upon by an external Elite Group of 30 and their Mexican VIP political slaves) in an economic system that has historically resulted, AND WILL CONTINUE TO RESULT, in a low standard of living, which includes low wages, long working hours, etc. etc. The proof is in the historical pudding.

    Although there is a rich class in Mexico who enjoys its standard of living “on Mexico”, many of the poor human beings would love to pull up stakes, move themselves to the area called “USA” and put down stakes there. They correctly understand that the “standard of living” of human consumers consuming on THAT area of the planet is much better than that of those living on Mexico.

    But unfortunately, those consumers living on Mexico (and Haiti, Cuba, Puerto Rico, Bangladesh, Malaysia, Thailand, Cambodia, Libya, Iraq, Yemen, Afghanistan, etc.) must be literally forced to stay on Mexico (etc.). The “standard of living” of the human consumers living on the USA and other “just lucky” nations depends upon the consumers living on Mexico (etc.) remaining on Mexico (etc.) and, most importantly, continuing to suffer their standard of living.

    To assist the consumers living on Mexico (etc.), the more-globally-experienced (former happy colonialists turned happy “globalists”) consumers living on the “lucky” nations will build physical and political “walls” to keep those human beings exactly where they are, lving the way they are.

    Absolutely ALL of what you hear coming out of CB and TBTF bank heads’ pie holes is gobbledygook very carefully designed to be unintelligible to absolutely everyone, INCLUDING THEMSELVES! So why do they say it? Because saying it maintains in the brains of those listening to it the illusion that what is going on in the world is something OTHER than a simple herd-management operation by an Elite which results in that same Elite and their children remaining the Elite — an Elite that creates our reality.

    The “standard of living” of the human beings living on Mexico (etc.) is THEIRS, and only theirs, to change. THEIR Step 1 is to design (“imagine”) a detailed economic arrangement between themselves that at least conceivably provides them all with a decent standard of living, as whatever they define it.

    Those VIP people who live on areas outside of Mexico, particularly those VIPs who have “investments” in Mexico, including The Group of 30 and their ilk will not only NEVER do that, again, they will do everything in their power, including brute force, to keep the relative standard of the human beings living on Mexico exactly as it is.

  6. Charles
    Dec 2, 2017 at 10:02 pm

    I can imagine rampant crime and corruption being a significant factor in rising prices. Productivity gets reduced when folks have to worry about bribes and security. Low supply is the result, but demand is always increasing due to population growth.

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