James Anderson
Chairman and CEO
Guanajuato Silver

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Inflation in Mexico: 2022 and Beyond

By James Anderson | Mon, 05/09/2022 - 09:00

The world is experiencing a sharp general rise in prices for products and services for the first time in nearly 40 years. Many observers have placed most of the blame for this general rise in prices variously on the COVID-19 pandemic (a hugely deflationary event), the effects of a strained supply chain (which would naturally rectify itself swiftly if normal capitalistic supply/demand reactions were allowed to take place in the marketplace) and the war in Ukraine (an event that began months after the current rising price trends began).

So, what is the real primary cause for the global rise in prices? Let’s turn to the great economist Milton Friedman for an answer, as he is often quoted as having said:

 “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” (Emphasis is the writer’s.)

Since the Great Recession in 2008, governments of the world, and especially their central banks, have participated in a systematic and nearly constant exercise of debasing their currencies through artificially low interest rates, enormous budget deficits, especially during the pandemic, and the outright printing of new money, usually through sovereign bond purchases by their respective central banks, colloquially known as “quantitative easing.”

In other words, inflation (over-expansion of the money supply) has been brewing at a hot boil for well over a decade. But it is only just lately that the effects of inflation a general rise in prices has become evident with such ferocity. Somewhat strangely, this phenomenon has become evident and identified in many places in the world almost simultaneously.  

Rising Interest Rates

To ward off the vile effects of rising prices (the seeds of which the central banks planted, watered, and cultivated in the first place), the central banks are now threatening to raise interest rates to dampen excessive demand in the economy. I say “threaten,” because despite all of the jaw-boning and central back rhetoric for nearly a year, 0.25 percent to 0.50 percent rate hikes are the only thing that have materialized for the vast majority of countries/central banks thus far in this cycle. Which leads us to the ultimate question on this subject: With government debts at all-time highs (both nominally and using debt-to-GDP figures), with rapidly rising energy costs, and with the ongoing effects of a shooting war in Europe, can the world’s central banks really raise rates fast enough to combat the rising prices that have been brewing for 12 years? We will see….

The Effects in Mexico

“Inflation” in Mexico (i.e., rising prices) continues to move higher. With information taken from the website Trading Economics, and in turn from Instituto Nacional de Estadística y Geografía (INEGI), the annual inflation rate in Mexico rose to 7.5 percent in March this year, up from 7.3 percent in February. It was the highest figure since January 2001, as prices advanced faster than the previous month for goods (8.7 percent versus 6.6 percent), particularly food, beverages, and tobacco (10.1 percent versus 9.4 percent). The core inflation rate increased to 6.8 percent, again the highest since 2001, and up from 6.6 percent in February.

Mexico’s inflation rate is likely not soon going to approach that of Argentina at 55 percent or Turkey at 61 percent, but do any serious observers expect the rate to remain BELOW that of the last published number of the US at 8.5 percent or that of Spain at 9.8 percent?

Price inflation is often sparked and accelerated by “perception” more than reality. People’s inflation expectations often become their realities. In this cycle, Mexican expectations and anticipation of future inflation has been muted recently. Being hard hit by the pandemic, while simultaneously having an economy more resilient as well as other recent events, may explain some of the low inflation expectations but that situation may begin changing quickly and dramatically.

With a Mexican central government seemingly disinterested in fostering business-friendly tax and regulatory policies, nor continuing with responsible fiscal policy, Mexican inflation may begin to trend toward the peso-destroying inflation rates of the 1980s. At that time, after spending most of the decade with inflation in excess of 50 percent, inflation peaked in 1988 above 150 percent annually. The restructuring of the peso came in the aftermath of that turmoil. At that time, interest rates in the US (at the central bank level) peaked at about 13 percent in order to squelch inflation in the US that peaked in the high teens. But with little room for the American Fed to raise interest rates without causing a considerable recession, one has to wonder what Mexican rates would have to rise to today before inflation and especially inflation expectations begin to trend lower in Mexico, rather than much, much higher.

My father used to tell me that “inflation is like a snowball rolling down a large hill. When it first starts rolling, at the top of the hill, few people notice, and it is not particularly dangerous. But as it rolls, more snow sticks to the ball, and it quickly becomes large, fast, and dangerous. That is when EVERYONE notices the snowball and no one dares to try to stop it.” Wise words, I think, from an older generation.

Photo by:   James Anderson

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