Economics: Holes in PACIC package for combating inflation, but it is positive that price controls are not included
The gravity of Mexico’s latest inflation results poses major challenges for the federal government and consumers alike, and immediately contributed to Banco de México’s decision last Thursday to raise its same-day interbank reference rate by 50 basis points for a fourth straight time, to 7.0%, in the monetary authority’s eighth consecutive tightening move.
April’s 7.68% annual inflation rate was driven by increases in both core inflation, which climbed to 7.22%, and the non core segment, whose 9.07% rise actually marked a significant drop from the same point in 2021.
In response to mounting inflation and supply chain challenges, the federal government along with the private sector announced an Anti-inflation and Cost of Living Package (PACIC), ostensibly for the primary purpose of containing price increases for basic consumer basket items. PACIC promises to fulfill that objective by expanding the supply of basic basket food items by stepping up domestic production of grains. But since Mexico is heavily dependent on imports to fill domestic grain demand, the plan also includes the temporary application of zero tariffs on imports of 21 of the products listed in Coneval’s basic basket, as well as on three strategic inputs.
Reduced production and transportation costs are expected to be achieved by stabilizing the prices of gasoline and diesel, as well as the reference prices for LP gas and electric power. In addition, the government is to expand fertilizer distribution and suspend the import quota on ammonium sulphate. The plan also calls for lowering logistical costs related to road security, tolls, tariffs, red tape, ports and customs.
But the plan may run into multiple obstacles such as the extent to which grain shortages are a global phenomenon and the considerable time it takes to accelerate crop production. This is a problem further complicated by the program's focus on small-scale and subsistence farmers, when only medium-sized and large-scale producers are capable of expanding agricultural supply to an extent that could lower prices. There is also a real risk that a temporary suspension of tariffs could lead to letting in products from countries that use dumping strategies, which could further de-incentivize domestic crop production. However, a positive aspect of the plan is that there were no mandatory price controls implemented; this was a risk that generated uncertainty in recent weeks prior to the announcement.
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