For 2022, what worries me most is inflation in Mexico and its relationship to economic growth.
Since March, rates have started to grow year-on-year above the Bank of Mexico target (3%). The latest data, corresponding to the first two weeks of October, amounted to 6.12% compared to the same period last year. We’re very far from those double-digit, three-digit inflations of the ’80s and ’90s per year. But it is also true that inflation has proven to be more permanent than expected, and this is beginning to cause concern.
Will we be able to return to Banco de México’s target soon without jeopardizing the economic recovery? The case is controversial.
When inflation began, most economists argued that it was a passing phenomenon that came from abroad. Developed countries, notably the United States, have implemented very aggressive monetary and fiscal policies to stimulate their economies after the total or partial shutdown due to the Covid-19 pandemic. This liquidity has increased as we have not seen in decades. Thus began a boom in the consumption of some products, especially household appliances.
Commodity prices rose rapidly. The global economy was not prepared for excess demand in certain markets. There was a shortage of some products. For example, in semiconductors, causing delays in automobile production. Transportation and distribution costs have also increased due to the closure of some ports. All this generated inflationary pressures.
The downturn in the global economy was severe last year. But the recovery has been very fast this year due to the huge amount of money that central banks and governments have put in to stimulate the economy. Most economists considered inflation to be temporary; To the extent that the problems of supply and stability of demand for some products are resolved, it will return to its historical levels.
In the United States, the historical annual inflation rate exceeds 3%. However, since May of this year, the rate has exceeded 5%. This has already set off alarms from the Federal Reserve, which has announced that in the coming months it may begin to reduce bond buying (the mechanism they use to inject liquidity) and raise interest rates next year (today is 0.25%).
If so, it will change the money cycle in America. It is the most important economic decision for the entire world. The challenge facing the US central bank is the timing of its decisions. If interest rates are late or early, it can be very dangerous for the United States and economies, such as Mexico, that depend a lot on this country.
In Mexico, since June, Banxico has started increasing interest rates to contain inflation and anticipates the change in the US monetary cycle. From 4% they raised it to 4.75%. Governor Alejandro Diaz de Leon said the central bank would continue to do so in order to achieve an “orderly convergence” that would allow it to return to the inflationary target.
However, not all board members think this way. Deputy Governor Gerardo Esquivel, along with two other economists, recently published an article titled “Inflation Dynamics in Mexico in the Context of Recovery and the Epidemic.” There they demonstrate empirically that “the present state of inflation can be considered transient in nature”.
Therefore, using monetary policy to control it would be “ineffective and ineffective”. Raising interest rates will not affect prices. It may even be counterproductive: “More restrictive monetary policy will have a direct and negative impact on a wide range of margins of the economy such as consumption, investment, credit to the private sector, public finance and national financial markets.”
Banxico is divided between “hawks” and “doves”. So far the first won, led by Alejandro Diaz de Leon. But the governor ended his term in December. He will be replaced by the former Treasury Secretary, Arturo Herrera, who is ideologically and personally closest to Esquivel. So, next year will we have a central bank dominated by “pigeons”?
We will have to be very attentive to the decisions of the Fed and Bancico. If both institutions do well, inflation will indeed be temporary. But if I’m wrong, wait, either because prices will rise further or economic recovery will be jeopardized.
Leo Zuckerman is a political analyst/journalist and TV host.
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