In an effort to fight rising inflation, President Lopez Obrador announced the Package Against Inflation and Scarcity (PACIC), which seeks to contain price increases in the basic food basket (BFB) while incentivizing to grow the supply of products.
Due to the disruptions in global supply chains caused by the pandemic, the world has had to confront, as product shortages in the market put pressure on prices. The onset of the Russian invasion of Ukraine has added to the inflationary pressures, increasing inflation rates to 20-year highs this year. By mid-April, 2022 inflation in Mexico had already reached an annual rate of 7.72 percent, almost four percentage points above Bank of Mexico's (Banxico) target rate.
To cushion the adverse inflation effects, President Andrés Manuel López Obrador is seeking out deals with the private sector to avoid ballooning prices for at least 24 BFB products.
The Anti-Inflation Package
Minister of Finance Rogelio Ramírez de la O explained that the government’s plan to control inflation begins with a price guarantee on products such as eggs, beans, milk, lemons, oil, rice, tuna, sugar, steak, onions and jalapeño peppers, among others.
The plan aims to encourage producers to grow their supply through an increase in the production of corn, beans and rice, paired with incentives for the Sowing Life program. This would augment agricultural production and eventually boost the supply of agricultural products available for the market.
As part of the incentives for Mexico's agricultural producers, the free fertilizer delivery plan will be expanded from four to nine states, with which the government intends to increase basic grains production by 2 million tons, in addition to 800,000 tons via the Sowing Life plan-
To speed up the increase in supply, the plan also contemplates eliminating tariffs for the import of ammonium sulfate and other basic inputs necessary for agricultural production. In addition, the government will increase surveillance on highways to prevent product theft. Likewise, it will not allow an increase in toll fees or railroad tariffs and will make customs clearance at ports cheaper and more efficient. “We do not opt for pure price control, because we believe that better supply and cost reductions stimulate competitiveness,” concluded Ramírez de la O.
The Effect on Inflation
Generally, price cap strategies have a counterproductive effect on inflation control, as they generate such a distortion in the market that a supply shortage worsens, leading to higher inflation and the creation of black markets. PACIC is not an inflation reduction strategy, but rather a price containment plan that seeks to prevent further accelerated inflation. Its effects benefit the consumer in the short term, but it does not solve the root of the problem.
On the other hand, the subsidies granted to control food and fuel prices build pressure on public finances, which is not sustainable in the medium term as the Special Tax on Production and Services (STPS) on gasoline consumption is one of the government’s main sources of revenue.
There are only two ways to reduce inflation: increase supply or reduce demand. Adjusting the supply of goods takes time. In the meantime, contracting demand is a bitter pill to swallow for consumers. If demand is to be contracted, the government will have to reduce its public spending. At the same time, Banxico must tighten its monetary policy and raise interest rates, which reduces consumption and investment, resulting in a slowdown of the economy.