Economics: A Pass-through Effect to Come
The increase in producer prices as tracked by Mexico’s national Producer Price Index (PPI) suggests that the higher costs will eventually translate into a higher rate of consumer inflation.
We should note the need to analyze the rise in producer prices from various angles. One of these is related to the rise in production costs whether in the case of final or intermediate goods.
According to GEA estimates, the pass-through effect of peso exchange rate depreciation will be registered over the medium and long terms on specific inflation components, regardless of the extent to which these have so far been mitigated by the general declines in commodity prices, including those for oil and energy, as well as the reduction in government-regulated goods and services resulting from the introduction of specific structural reforms.
This week we analyze which PPI components are likely to serve as conduits for such an eventual pass-through effect on consumer inflation.
In other economic news, last week the authorities reported that producer confidence continued to stumble deeper into pessimistic territory in August 2015.
The National Statistics Office’s business confidence indexes (ICE) for the construction, commercial and manufacturing sectors showed business owners growing increasingly pessimistic about the current and future state of both the economy and their businesses and more reticent about the prospects for investing in their enterprises.
In contrast, the Consumer Confidence Index (CCI) rose 0.8% in August, this indicator’s weakest gain since this index embarked on a new growth trend in November 2014.
The weakness of August’s report can be traced to perceptions of the economy’s trajectory. Consumer expectations of how the Mexican economy is likely to perform in the next 12 months continued to fall in August (-5.0%) after having plunged 12.4% during the same month a year earlier. When asked how they believe the Mexican economy is performing compared to August 2014, consumers were 7.3% more downbeat, the most pronounced sagging of sentiment since a 7.7% plunge in 2014.
The above readings of producer and consumer sentiment reflect the continuing weakness seen in many economic indicators.
Further evidence of a softening of the Mexican economy was provided by the National Statistics Office’s latest readings of cyclical indicators. In an extension of the downtrend in place since late 2014, the leading index decreased 0.09 points to a reading of 99.6 points, which is below the 100-point threshold of its long term growth trend.
GEA currently estimates that GDP will grow 1.8% year over year in the third quarter and 2.0% in the fourth quarter.
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