Economics: Inflation pressures continue to mount

MEXICO - Report 28 Jul 2021 by Mauricio Gonzalez and Francisco González

Last week’s inflation results for the first half of July showed 12-month consumer inflation at 5.75%, with its core component lagging the headline rate at 4.64%, while non core inflation surged ahead once again at 9.24%. The core component was led higher by a roughly 6% increase in food prices, while energy products (more specifically gasoline and LP gas) and livestock products were largely to blame for the surge in the non core rate.

One of the factors that has propelled inflation higher in a context of depressed domestic demand is the effect on consumer prices of a rising National Producer Price Index (NPPI). In this sense, the NPPI components that experienced the strongest year-over-year increases in June also corresponded to the rise in prices for consumer goods such as petroleum derivatives (gasoline), which were up 31%, while those of metallic and chemical products, as well as those of agricultural and agro-industrial product rose by around 10%.

While we can trace some of these heightened inflationary pressures on transitory factors, such as broader rises in some commodities or pandemic-related distortions along supply chains, other aspects may be contaminating inflation expectations in ways that could persistently push prices higher as we move forward. For that reason it is especially important for Banco de México to respond in a timely manner to price increases arising out of heightened inflation expectations or possible episodes of peso depreciation in response to a narrowing of the US-Mexico yield spread.

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