Economics: Rising inflation complicates policy choices
Minutes from Banco de México’s most recent monetary policy review (March 25) show most board members agree the rate pause they unanimously approved at that meeting does not signal an end to the easing cycle dating back to August 2019 that slashed 8.25 percent off the reference rate. They may get some help in sustaining that possibility given the Federal Reserve’s continuing dovish commitment to forego any tightening and to hold its rates near zero at least through 2023. But Banxico board members, along with finance officials are facing a tougher situation on numerous fronts, starting with the extent to which consumer prices have surged in recent months, with inflation climbing in March to 4.67%, the highest level since December 2018.
The upswing continues to be led by energy prices, with base effects expected to continue to push fuel inflation beyond its 14.55% March reading. The price of the LP gas most homes depend on for cooking came in at 36.5% above levels of a year ago, and gasoline is up 11% thanks to higher import prices. The only way officials can make good on constant promises to lower gasoline prices is to subsidize them through negative excise tax rates, but the government is already trying to cope with increasing spending pressures at a time of mounting revenue shortfalls.
Most troubling is the extent to which lower income Mexican households are feeling the brunt of the disproportionate rates of inflation on the food and non food baskets tracked by Coneval. Those prices outpaced headline inflation throughout 2020 and into the first two months of the current year, gains clearly not being driven by any firming of aggregate demand as private expenditure levels remain depressed. Instead, the cause is to be found in supply problems and some shifts in consumer priorities, such as the greater importance given to cleaning products and pharmaceuticals.
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