Mexico Uncertainty looms
By: Jesus Leal Trujillo
Inflation and uncertainty ous decades, it is significant enough to warrant at- around NAFTA could slow tention. The liberalization of the energy market, a down growth in 2018 depreciation of the Mexican peso vis-à-vis the dollar, and uncertainty regarding the North American Free The last 15 years have witnessed a period of mac- Trade Agreement (NAFTA) have all helped contrib- roeconomic stability previously unseen in Mexico. ute to the spike in inflation. As Mexico enters the However, by November 2017, inflation had reached new year, the stability achieved over the past de- 6.6 percent on an annual basis.1 While the current cade or so may become fragile. The renegotiation of spike is nowhere near the levels registered in previ- NAFTA looms large over the Mexican economy. Mexico: Uncertainty looms
Inflation strikes back and other fuels. Given the early 2017 gasoline price deregulation, it is not surprising that the energy The 6.6 percent year-over-year inflation rate in price index registered a 17 percent increase from November was almost double the average annual the previous year. The prices approved by the gov- rate of 3.5 percent registered between 2012 and ernment index (Energéticos y tarifas autorizadas 2016. While core inflation posted a 4.9 percent rise, por el gobierno), which captures the relative cost of noncore inflation increased by a significant 12 per- other parts of the energy sector, also registered an cent.2 At first glance, these numbers appear alarm- annual increase of 8.2 percent. ing, but it is worth remembering that during the Alongside the rising costs of energy and fuels, 1980s and 1990s, prices rose 44 percent per year on the depreciation of the Mexican peso against the average.3 It wasn’t until the aftermath of the 1994 fi- dollar―as of December 2017, the peso lost 12.4 nancial crisis that Mexico adopted robust monetary percent of its value with respect to December 2015 policies aimed at stabilizing the exchange rate and levels―also contributed to higher prices of basic controlling spiraling prices. staples for Mexican consumers. Fruits and vegeta- One of the main factors behind the recent in- bles and meat and eggs posted annual increments crease in prices is the liberalization of gasoline pric- of 14.9 percent and 5.2 percent, respectively.5 One es in Q1 2017. The change in policy was part of Pres- of the often-overlooked aspects of the trade rela- ident Enrique Peña Nieto’s marquee energy reform tionship between Mexico and the United States is approved in 2013, which ended a 75-year monopoly the agricultural sector. In 2016, Mexico imported on the energy sector.4 Besides opening markets for food and live animals worth more than $14 billion— private investment, the initiative also ended a policy 76 percent of its agricultural and animal product of fixed prices and eliminated subsidies for gasoline imports—from the United States.6 About 43 percent
Figure Consumer price index CPI and its components, 2 2 2 6
160
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1 0
120
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90
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Jan 2012 Jul 2012 Jan 201 Jul 201 Jan 2014 Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017
CPI Core CPI onCore CPI
Source: Deloitte analysis of ational Institute of Statistics and eography I E I data. Deloitte Insights deloitte com insights
2 Mexico: Uncertainty looms
Figure 2. Annual change in noncore inflation price index and energy sub-indexes, 2012–2017
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15
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5
0