Mexico: Inflation Spikes to An Annual 6.85 Percent

In the past month Mexican consumers have experienced the rise in prices for basic commodities and food products. This is because inflation grew 6.5 percent in annual terms reported INEGI.  This percentage marks an all-time high since 2017, when the governmental institution reported inflation at 6.85 percent in the second half of the year. The increment of food, energy and tobacco prices has affected the indicator, Reuters reports. "Banxico's forecast for the future is that the economic shocks led by the rise in the prices of goods and services or observed inflation will be predominantly temporary and they will be adjusted in the following quarters," stated Alejandro Díaz de León, governor of the Bank of Mexico (Banxico).

Banxico´s monetary policy objective is to maintain yearly inflation at 3 percent. In addition, the institution previously implemented an interest rate reduction policy to control inflation. In March, the board of Banxico in an unanimous decision placed the interest rate at 4 percent as the institution expected an increase in consumers' prices. The rate marks the lowest level that has been placed since 2016. The bank has pointed out that the global economic activity continues to recover at different rates between countries and sectors due to the economic crisis of the coronavirus, delays in vaccination programs and the tightening of financial conditions.

Recently the International Monetary Fund (IMF) suggested that Banxico will face a weak economy under pressure to meet its inflation target. "Looking ahead, the central bank must attain a careful balance to navigate between the weakness of the economy and at the increment of inflation driven by rising commodity prices,” said Evan Papageorgiou, deputy director of the financial and capital markets of the IMF to El Economista.

Moreover, Mexico is not the only country experiencing rapid inflation. The trend persists in many countries across Latin America, which is considered one of the most affected regions by the coronavirus outbreak. In March, monthly inflation accelerated in Chile, Brazil and Argentina, led by high fuel costs. The World Bank reported in their bi-monthly report "Commodity Markets Outlook", that "higher inflation expectations could affect prices in Latin America in a context where there is also the risk of monetary pressures against the faster recovery from the US”.  Mexico experienced in 2020 a contraction of 8.5 percent of the Gross Domestic Product (GDP), the largest decline since 1932. As a result, analysts indicate that in a highly uncertain environment, with risks to inflation, economic activity and financial markets the Central Bank faces significant challenges for monetary policies.