Surging Prices in Slowing Economy: Tough Year for Mexico

Bank of Mexico faces stagflation or worse.

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

Mexico has begun the new year in much the same way as it began the last one — with news of a gasolinazo. This time the tabled increase in fuel prices, at 6.9%, is considerably smaller than last year’s eye-watering one-off hike of 20%, but with inflation already at well over 6%, in part due to last year’s gasolinazo, the consequences are still likely to be severe.

The main reason for last year’s hike was the liberalization of Mexico’s energy market which put an abrupt end to most of the government’s fuel subsidies. It was also done for a fiscal reason: over just a few years, Mexico’s fast-shrinking state-owned (but soon to be privatized) oil giant, Pemex, had morphed from a huge funding asset, at times providing as much as one-third of total government revenues, to a national liability, requiring a $4.2 billion bailout from the government.

Empty Promises

Mexico’s reformist president Enrique Peña Nieto had repeatedly promised that market liberalization would lead to markedly lower prices at the pump. However, as his government began withdrawing the generous public subsidies that had underpinned the market for decades while raising fuel excise duties to help fill at least a few of the holes on the government’s balance sheets, the only way for prices to go was up.

The price jumps sparked a wave of protests in Mexico’s main cities that led to 500 arrests for robbery and vandalism just in the capital and neighboring state Estado de Mexico alone. The price hike also cost the state-owned oil company, Pemex, hundreds of millions of dollars worth of stolen fuel last year as oil theft, now one of the biggest sources of funds for Mexico’s drug gangs, surged to unprecedented levels.

Now, 12 months on, the prospect of a new, albeit smaller, gasolinazo has raised concerns that Mexico could be about to witness a new wave of violence. The Mexican Association of Gas Station Owners (Amegas) warned in a public statement on Tuesday that the price of gasoline could rise up to 7% if the federal tax to which petrol is subject (the IEPS) keeps going up.

Both the Pemex and the government were quick to play down the forecast.

“Petróleos Mexicanos affirms that it will maintain the policy of gradual changes in fuel prices and categorically rejects any speculative comments regarding alleged increases in them. There is no basis for expecting an abrupt increase,” stressed the management of the former state monopoly in a statement. In other words, prices will not rise “abruptly”, but they will rise.

Contagion Effect

Even as early as Jan 1 prices at the pump had begun creeping up, although there were sharp regional variations due to differences in logistical costs. In some states, including Oaxaca and Tijuana, the increases were as much as 66 cents (centavos) per liter for regular gas and 70 cents for Diesel.

The knock on effects on basic food costs are already being felt. The average price of the country’s staple food, corn tortilla, consumed by 21 million of the country’s 26 million families, is estimated to have increased by 35% since Mexico’s last gasolinazo. According to the national tortilla-maker association, there could be a further 20% rise in prices in the coming weeks due to cost pressures.

The last time the price of tortilla rose so fast, in 2006, it led to food riots. At its climax, prices reached as high as 10 pesos per kilogram, before temporary price controls kicked in. Since then average prices have more than doubled and are now as high as 18-19 pesos in some regions.

It’s not just tortillas that are facing price pressures. According to Ruben Vasquéz de la Rosa, president of the national association of grain growers, the rise in the price of diesel, which is essential to run farm vehicles, could trigger price increases of between 15-20% for basic grains like corn, wheat, rice and beans. Eggs are also up between 10 and 15% over the last month, depending on the type.

It wasn’t meant to be this way. The Bank of Mexico spent most of 2017 raising rates and confidently forecasting that inflation would be back under control by the end of the year. And this is what happened:

The consumer price index rose 6.63% in November, over double the central bank’s target rate and the second highest level in the last 16 years. It’s one of the reasons why the Bank of Mexico pushed its policy interest rate to 7.25% in its December meeting. Some of the members of the board concede that bringing inflation down could be a lot harder than previously anticipated.

Mexico is already facing major challenges in 2018, including:

  • The potential for a breakdown in negotiations with the Trump administration over NAFTA 2.0;
  • A possible shift in capital flows from Mexico to the US due to Trump’s recent tax reforms as well as likely further hikes in the Federal Reserve rate;
  • A slowing economy, as evidenced by a 0.3% drop in third-quarter GDP and, for the first time since 2009, sliding annual automotive sales in 2017.
  • A weak currency, which recently resumed its long-term downward trajectory against the dollar, falling 7.5% since September. And any rate increases by the Federal Reserve will put further downward pressure on the peso.
  • The political risks posed by this summer’s general election, which could see arch-populist Andres Manual Lopez Obrador elected as president. This prospect, together with the risk of a breakdown in NAFTA renegotiation, was enough to win Mexico fourth place in the Eurasia Group’s top global political risks of 2018.

To put a lid on price pressures and keep up with the Fed, Banxico could raise its policy rate further, but in the process it would be strangling credit growth and hurting economic activity, in an environment of surging prices and crumbling real wages. By Don Quijones.

Ironically, banks in Mexico are clamoring for it. Read…  Next Phase in Forcing Biometric Tracking on Consumers

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  27 comments for “Surging Prices in Slowing Economy: Tough Year for Mexico

  1. AV8R says:

    Nothing to worry about. Something like this can’t possibly happen here in the US.

  2. alexaisback says:

    …….The document, which Bloomberg reviewed, sets a starting wage of about $1.10 per hour and a top wage of $2.53 for assembly-line workers.

    Mexico sells out — that is why this is so devastating.

    And a disaster for the US —– no one can compete with these wages.

    . Trump is actually helping the Mexican worker
    time for these slave wage contracts to be undone.

    • John Doyle says:

      America will simply raise its subsidies. After all it was subsidised corn which trashed the home corn crop thanks to NAFTA.

    • Nicko2 says:

      Nonsense, new factories in the US are nearly fully automated. —and robots are cheaper than the cheapest Mexican factory worker.

      • So cheap they never take their wives to dinner, their kids to the movies, buy a new car, or take a vacation. They add just about nothing to GDP in that regard.

        • Robert says:

          I am a Luddite and agree with you fully.

          No doubt in the late 18th Century I would have been a Tory as well, no doubt.

          At least with respect to the various machines being introduced in the early 1800-s — the Luddites were wrong about eliminating the machines, WERE THAT THEIR GOAL. But I think it was not.

          I agree ONE HUNDRED PERCENT WITH YOUR POST, but I am not sure what can be done. Machines are so productive ( watch “How It’s Made ) I don’t think that even half of humanity can be gainfully employed.

          Well, not in producing the things necessary to life, e.g., food, energy, clothing, housing and transportation mechanisms.

          Perhaps the unemployed and unemployable can be kept busy producing things of no value, like all of those web things that young people do, that I have no use for.

          Maybe more games and massive multi-user online games, etc.

          People need jobs, the Luddites knew that, you do and maybe even some of our leaders know that too.

        • Kraig says:

          Solution here is to either tax the robots or give them a minimum wage (Perhaps the robot minimum wage could go into a trust, with any surplus after.electric and maintenance of said robot to be distributed to the people.)

    • MC01 says:

      An acquaintance sent me a picture of a brand new automotive components factory outside Guanajuato. It had a huge banner on the side proclaiming “Now hiring!” followed by a phone number.
      Automotive factories are starting to have a hard time filling open positions, especially given their extremely high turnover rates, for the simple reason working in the “grey economy” means a better pay, even if there’s no job security.
      Just to give an example even the farm laborers working in the avocado orchards in Michoacán, Nuevo León and Puebla are paid better than automotive workers, or over $3/hour, albeit wages growth is not so much due to an increase in productivity or improved labor conditions but due to the threat from cartels.
      Michoacán is in the grip of a fight for supremacy between two powerful criminal gangs which found the protection racket more profitable than running drugs, and farmers and laborers (most avocado farmers are not big latifondistas but small landowners) have been fighting back. This means murder, kidnapping and torture are not uncommon, and laborers need to be compensated to stay on the job.

      As the saying goes “Just try not to think how many lives it cost”.

  3. Paulo says:

    Pretty rough situation. I used to visit Mexico years ago. Many of my friends still do, leaving Canadian winters for the warm west coast around Melaque. In fact, there used to be so many Vancouver Islanders in that area it was common to run into people you know from home.

    My friends rent apartments for a month or 6 weeks and wouldn’t go anywhere else, they like it so much.

    Food riots and unrest would scare these folks away I would imagine. A drop in tourism is all Mexico needs at this point, although with the NAFTA crap going on they might be even friendlier to Canadians.

    IF Trump gets rid of NAFTA I would really like to see a new trade agreement with Canada/Mexico and other latin American countries, in addition to S America. Then, link up tighter with SE Asia/China. Trading corn/wheat for citrus/vegetables looks pretty good to me. :-)

    Mexicans work damn hard as far as I’m concerned and common citizens have never got a fair shake at sharing the wealth. I think it wouldn’t take too much more to turn it all into a tinderbox. Big problems and few solutions with options narrowing every year.


    • Nicko2 says:

      My millennial sister and her family westjet down to Mexico from Canada several times a year, always a 5-star all inclusive resort. They seem to like it for some reason — could be because it’s cheap.

      • Enrique says:

        In some places within the country (esp. Guadalajara & thereabouts) there is sort of a cottage industry in catering to the large numbers Canadians who live there/visit for large segments of the year.

        I’d put the appeal down to weather and the fact that Mexico is actually a pretty decent place with a lot of good people. Hamstrung almost 100 years of utterly absurd misrule by the PRI. (Interrupted only by a short interval of another sort of misrule by Fox and his people). And then the utter pathologies created by the “drug war” and all that entails.

        In any event it is a fascinating place and culture. Seems like almost every country is almost comically misgoverned anymore so the differences between Mexico and the so-called “first world” may increasingly narrow in the coming years.

        • Raymond Rogers says:

          Except that disorganized violent crime causes more anxiety than organized whie-collar crime. With the hierarchy of needs, safety ranks among the the most pressing.

          It’s a shame that a large segment of Mexico lives abroad. But because of the embrace of the bandit culture, Mexico will be relegated to the status of a third world country. If they got their act together I’d imagine they could be 5th in the world GDP wise. They have people, free markets, resources, climate, tons of beachfront properties, weather most people want, and located next to a massive consumer country.

          Yes some people go down these, but those who know more about what goes on wouldn’t dare to venture there. It is like playing roulette.

      • Wolf Richter says:

        Not just because it’s cheap. Mexico is a great place to visit. Beautiful country, spectacular landscapes, gorgeous quaint colonial towns, ancient ruins, super-nice people, great food….

        The risks can be a problem. But if you can stay away from those risks, it is most rewarding on many levels.

        • Waves4me says:

          Exactly Wolf. I lived in México for seven years and found the people to be wonderful on average. They have a unique ability to find the humor in most situations. I have never seen a happier place. Family bonds are strong also and they respect elders. Something we are loosing here in the US, unfortunately….

        • lenert says:

          We always meet lots of Canadians in Cabo. We stay at a complex of older, privately owned units. After the hurricane, the staff kept the place open and fed everyone using up all the kitchen inventory and eventually cooking whatever other people brought in. The government flooded the zone with linemen and got the power back on in about two weeks.

        • Wolf Richter says:

          Ah, RDE, a blast from the past … music from a quarter century ago.

  4. Mike Earussi says:

    Too many people milking Pemex with no investment to maintain its infrastructure would destroy any company. Multiply that by the pandemic corruption throughout the rest of the country and you have a receipt for an eventual failed state, which would not be very good for the U.S.

    The inability of humans to think in the long term instead of just the short term has doomed every country in the world to eventual collapse throughout history. Our time will also come as our corruption increases faster than our ability to produce.

    Where there is no vision the people perish.

    • Wolf Richter says:

      Ha, liar. Paid liar. “Andres Suarez,” you’re not Mexican, and you’re not in Mexico. Your IP address is in St. Petersburg, Russia — I just looked it up. This is where the Russian “Troll Factory,” the Internet Research Agency, is located. You’re a paid Russian troll. You guys never learn anything.


      I allowed the comment, rather than just blocking it (as I normally do) to show you a live example of how the Russian trolls are operating. I get this stuff ALL THE TIME.

      The Chinese “50-cent Army” operates on a similar basis.

      But the Russian trolls are different than the Chinese trolls. Unlike the Chinese trolls, who’re focused on China, the Russian trolls try to urinate on relationships between people in the US, and between people in the US and other countries, they try to make people hate each other, they try sow discord among us to weaken us.

      It’s always the same, and they’re actually easy to detect. In unmoderated comment sections, these trolls have free rein. But here, they don’t. And this is an example presented to you by yours truly for your entertainment


      • RAYMOND ROGERS says:

        They are going to learn if you don’t quit teaching them.

      • Robert says:

        I get telephone calls with spoofed caller-ID information in the window. They are easy for me to detect, based on my knowledge of my own incoming call history. And on the sensibility of the spoof that is presented, sometimes the fakers have me getting a call from me !

        But this, what you describe, I have no experience with this at all. I always knew there were comment “spoofers” — but the example you give above is stunning in its meaning and purpose.

        So what’s the effect ? Can these “trolls” move the needle of public opinion in some major way with lots and lots and lots of little comments and tweets ?

        Does endless and mindlessly repetitious advertising on TV work ? Did the beer-hall speeches of a hurt and angry little man eventually change the face of Europe — and help kill tens of millions in WWII ?

        Thanks for educating me, yet again !

  5. marco says:

    No problem Criminal central bankers will all keep hitting the F1 key – creating counterfeit “money” out of thin air.

    But just for them and their rich friends -and the politicians and regulators
    they can now purchase at will.

    A criminal, totalitarian oligarchy posing as a “democracy” .

    (Eric Holder for President?)

  6. Petedivine says:

    If you think its bad now..wait until PEMEX has exhausted their reserves. This article from Bloomberg written April 2017, claims Mexico only has 9 years of oil reserves. That was last year. I guess they only have 8 more years of oil left.

  7. Thomas R Kauser says:

    Maybe Carlos slim could ship his products wrapped in yarn instead of plastic to save a dime? The shrinkflation is an abomination! War bonds or something to soak up the excess reserves?

Comments are closed.