Living, Money

A Comment on Mexico’s Rising Prices

Changes to how gasoline is priced and a lower peso are causing prices to rise in Mexico

Mexican Pesos Montage

Mexico was just getting used to historically-low inflation when early this year the annual rate began to rise quickly—from 3.4% in December, to 6.2% by the middle of May. It’s the first time that consumer prices have risen that much in a year since the crisis of 2009, when Mexico was pushed into recession after the U.S. housing bubble burst.

Then as now, the reason for higher inflation was partly the depreciation of the peso against the U.S. dollar, which makes imported goods more expensive and causes costs to rise for producers that rely on imported parts. This time around, however, the effect of the currency losses has taken several years to filter through noticeably to final consumers. Things like services which are labor intensive and have costs based mostly in pesos, haven’t been affected as much as goods.

This is a far cry from Mexico’s years of high inflation in the 1980s and 1990s, when people would use peso devaluations as an excuse to put up prices of everything, from homemade products to rents. This also led to greater wage demands, which in turn led producers to raise prices creating a spiral in which inflation invariably ended up ahead of incomes.

After more than 20 years of inflation-targeting by the Bank of Mexico, and well over a decade of low inflation, there is greater confidence among producers and consumers that the current spike in the annual inflation rate will be temporary, i.e. that it will likely return to the central bank’s target range between 2% and 4% in 2018. But for this year, economists are predicting that inflation will be about 6%, which is still almost double what it was in 2016 and triple the 2015 rate of 2.1%.

One reason for that confidence is that the big increase in gasoline and diesel prices in January had a significant impact on overall inflation. The fuel price increases were a combination of government policy — the decision to stop absorbing higher costs of gasoline imports by adjusting down the excise tax — and the peso’s fall against the dollar, since Mexico buys more than half of the gasoline it uses. (Even if it didn’t import that much, the government would still use international reference prices.)

Since annual inflation measures a moving 12-month period (a snapshot of the past year’s data at any given time) one-time bumps like that of the gasoline increase disappear from the measurement after a year. People can often be heard to complain that by doing this, the real increase in the cost of living is hidden from the data.

This is true up to a point. Higher prices are absorbed over time through increases in wages, and after a certain number of years, relative prices become somewhat irrelevant, especially when considering periods of high inflation. For example, using the calculator on Mexico’s National Statistics Institute website, the consumer price index can be seen to have risen by about 812,000% since 1969.

But in the last 10 years, overall prices have risen just 50% — an average of 0.34% per month — even with the 41% depreciation of the peso over that time. The previous decade—1997-2007—prices rose 106% or 0.6% per month, and the decade before that 1,349% or 2.25% per month.

It’s also worth noting that the price inflation story is not confined to Mexico. Many countries world-wide are experiencing higher inflation across a range of products and services including food, energy, healthcare, and education.

Our Mexico Cost of Living Guide, published annually, enables readers to create an accurate estimate of living costs based on individual situations and personal lifestyle choices. As part of the guide we also track over 100 grocery items that people tend to purchase most weeks of the year, and publish prices of these going back three years, so you can see how those prices have changed over time.

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