Mexico’s central bank expects inflation to peak between 7.0% and 8.0% in the second quarter of 20226, then begin a gradual downward trend to end the year around 7%. Nevertheless, inflationary pressures remain severe, mainly due to the ongoing conflict in Ukraine, but also due to the lingering effects of COVID-19: China, under its zero-tolerance policy towards the spread of virus, recently implemented strict lockdowns in 70 of its cities. This has caused major disruptions in Chinese supply chains, leading to global delays and shortages, which likely fueled inflation in key sectors.
Fight against inflation
The Central Bank of Mexico (Banxico) began raising its benchmark rate in June 2021 in an attempt to keep inflation manageable – between January and June 2021 inflation had risen from 3.5% to 5, 9%. The initial rate hikes were relatively modest at 25 basis points each, but from December 2021 Banxico began to act more aggressively, raising rates by 50 basis points. Consequently, the interest rate in Mexico rose from 4.0% to 7.0% in less than a year. Moreover, at the last Banxico meeting, a member suggested that it was imperative to raise interest rates by 75 basis points given the current environment, which shows the extent of the problem. Given this backdrop and signs of more rapid Fed tightening, Mexico’s benchmark rate could end the year above 9.0%, its highest level since Banxico began holding records in 2008.
Recently, the Mexican government also unveiled a policy program to fight inflation.seven The strategy aims to boost cereal production and support its distribution, cancel import duties on certain inputs and reach agreements with companies to cap product prices. The government expects these measures to have a positive effect on the prices of 24 basic products (22 food products and two essential goods) which represent 13.03% of total inflation.8
This policy supplements the actions already implemented on the energy front: fiscal stimulus in response to the rise in gasoline prices. Last year, the Mexican government found itself faced with a dilemma. On the one hand, the fuel price subsidy would have led to lower public revenues, which would have had a negative impact on public investment. On the other hand, an uncontrolled rise in fuel prices would likely have had disastrous social costs and further fueled inflation. It is therefore not surprising that the administration has come out in favor of the subsidy – even if, if the current subsidy is maintained throughout 2022, the cost to public finances would be around 16.5 billion dollars. dollars, which is equivalent to 5.5% of all public expenditure. revenue collected in 2021 (1.26% of GDP).9
With the subsidy, the government absorbs some or all of the tax collected on gasoline to prevent consumers from paying higher prices. With the further rise in global oil costs this year, the subsidy has also been increased and since early March no special tax has been levied on gasoline.ten Recent data released by the Organization for Economic Co-operation and Development (OECD) shows that due to government subsidies, Mexico’s energy inflation rate was the lowest among 38 OECD members in March 2022 (figure 5).11 Indeed, according to the Ministry of Finance, without gasoline subsidies, general inflation in Mexico would have reached 10%.12