Outside Pressures are Distorting Mexico’s Inflation Rate

Board members from Mexico’s central bank (Banxico) coincide that the country’s observed inflation rate has inched upward over the past six months due in part to rising global inflation rates and bottlenecks in production, which were in turn caused by supply chain disruptions from both the COVID-19 pandemic and extreme weather events. Although experts predict the country’s interest rate will stabilize from the medium term onward, will climate change allow it?

At the end of September when the country’s inflation reached 6 percent, Banxico’s board members raised the benchmark interest rate by 25 percentage points to 4.75 percent. Per Banxico’s standards the rate is supposed to rest at 3 percent with a deviation-margin of plus or minus one percent.

Now, according to median forecast of fifteen analysts, the central bank should expect year-on-year inflation to reach 6.10 percent for October. This far exceeds Banorte’s August forecast, which anticipated inflation to close at 5 percent at the end of the year thereby indicating a sudden exacerbation in market conditions.

Although board members expect headline and core inflation to increase again and spill into 2022, they do expect medium and long-term inflation to remain more stable as the global economy climbs out of a distorted market affected by government subsidies, supply chain disruptions and production bottlenecks. "The majority of members pointed out that inflationary pressures are associated with shocks that are expected to be transitory. However, they noted the risk of a negative impact on the price formation process," the minutes read.

However, the global energy crisis affecting every corner of the world, due in part to extreme weather events and an incomplete energy transition, could potentially act as a inflationary pressure for at least the next five to ten years. Already, disruptions have increased energy prices, which will mean increased production costs in other sectors.

Similarly, the country hasn’t seen inflation this high since 2017 when inflation peaked at 6.13 percent due to the combined effect of a weak peso and the end of government controls on gasoline and other fuels. This time, however, it is not just Mexico; it is the global economy.