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Without PACIC, Inflation Will Be Above 10 Percent: SHCP

By María José Goytia | Tue, 08/09/2022 - 17:07

After three months of operation, the Ministry of Finance published the results and costs of the Package Against Inflation and Shortage (PACIC), a strategy aiming to slow the accelerated price increases Mexico is experiencing.

Minister of Finance Rogelio Ramirez de la O shared the results of PACIC, which he said has yielded positive results. "Without this package, inflation would have been 10.76 percent, 2.6 percentage points higher than the current 8.16 percent rate. Thanks to the measures taken, inflation in Mexico is lower than in other countries, including the US," he said.

Moreover, without the anti-inflation measures, the purchasing power of the minimum wage would also have decreased by 12 percent. In June, the minimum wage equaled MX$8,943 (US$438). Without government support and with inflation at 10 percent, this wage would have decreased its purchasing power to MX$7,900 (US$387).

So far, PACIC has cost the government MX$574.62 billion (US$28.12 billion). The main aspect of the strategy has focused on a 100 percent subsidy to the Special Tax on Products and Services (STPS) on gasoline, which has cost the public treasury MX$430 billion (US$21 billion). For the rest, MX$73 billion (US$3.57 billion) has been spent on residential electricity subsidies, MX$68.87 billion (US$3.37 billion) to control food costs and MX$2.75 billion (US$134.6 million) to freeze highway fees.

Minister Ramírez de la O also highlighted that without PACIC's implementation, household consumption, sales volume and VAT collection would have fallen, hampering economic movement. On the other hand, a stronger rise in inflation would have provoked a greater increase in interest rates by the Bank of Mexico (Banxico), further increasing the cost of public and private debt.

"This package is fulfilling many functions, the resources being used in PACIC would have had no better use,” assured Ramírez de la O. “We are seeing good results with this package, but we also see where it needs to be reinforced. We commit to keeping energy costs stable, to keep basic imports open, to limit the export of white corn, to secure an agreement with the US to import milk and fertilizers, to maintain railroad tariffs low and to continue with the stabilization of the basic food basket’s prices,” he added.

 

PACIC's Success Questioned

Specialists have debated if the PACIC has been truly successful, as the package has not met its objective of combating inflation and its results have been limited to merely containing its advancement. First, there is a lack of evidence that PACIC has worked to lower food prices, as data only show positive results in the containment of gasoline prices, which did contribute to avoiding a greater negative inflationary spiral.

"Where we do see a more noticeable effect in gasoline. On that side, we could say that PACIC has worked meaningfully regarding energy prices," said Ricardo Aguilar, Chief Economist, Invex Bank.

Yet PACIC has not had a noticeable effect on agricultural products. For the measure to be successful, the price evolution of the 24 products that belong to the basic food basket should be contained. However, so far, the price of none of the items in this basket has decreased. On the contrary, food inflation went from 13.72 percent in April 2022, before PACIC, to 15.22 percent in the first week of July.

Another criticism zones in on PACIC's cost. In three months, the package has cost around MX$574.62 billion (US$28.12 billion), with 75 percent destined to subsidize the gasoline STPS. Specialists criticize that such a stimulus to gasoline prices acts as a regressive subsidy, benefiting the population with higher purchasing power more than those who are the most vulnerable to inflation. Therefore, questions arose about the decision to allocate so many resources to a package that has had poor results and costs the treasury too much.

If all these subsidies continue, government spending could face a crossroads in the short term, since one of its main sources of income, the STPS on gasoline, is not being collected.

The federal government has argued that the increase in fuel prices will make up for the revenue lost from the STPS. However, BBVA data shows that oil surpluses in 2022 may not be enough to compensate for the lost revenue.

 

Inflation Expectations

Despite efforts to tackle inflation, economic projections show that it will continue to rise for the rest of 2022, closing at 8.25 percent. Invex Bank estimates that inflation will peak between August and September, when it will reach 8.50 percent. It will begin its decline until 2023 when it is estimated to close at 5.15 percent. The continued rise in prices will lead Banxico to continue increasing its interest rate, which is projected to close at 9.25 percent by the end of 2022.

The data used in this article was sourced from:  
El Financiero, Forbes México, Dinero en Imagen, Expansión, Mexico Business News
Photo by:   Pixabay
María José Goytia María José Goytia Journalist and Industry Analyst