Economics: Rising inflation and mounting risks heading into 2022

MEXICO - Report 13 Dec 2021 by Mauricio Gonzalez and Francisco González

Consumer inflation continued to accelerate in November by climbing 7.37%, the highest reading in more than 20 years as a series of risks pose the threat of a price spiral in the year to come. Clearly this is part of a much broader global phenomenon, but there are specific risks in Mexico that raise the specter it will not be brought under control, with inflation expectations continuing to contaminate price formation for 2022.

Contributing to that process is the announcement of a disproportionately large fourth consecutive annual minimum wage hike. While any lighthouse effect has been largely muted to date, under current conditions we can expect the new 22% increase to contaminate contract wage expectations, potentially injecting further momentum into the inflation upswing.

Moreover, the previous hikes (2109, 2020 and 2021) have not been accompanied by a corresponding rise in labor productivity and came at a time when businesses were presented with a difficult economic environment that entailed an earlier reticence on the part of companies to directly pass those higher costs to final prices, a reluctance that is increasingly behind them. And there is a risk that a monetary authority dominated by officials nominated by the López Obrador administration will hesitate to raise the reference interest rate in a timely enough manner.

Estimates of the extent to which inflation is expected to rise next year are reflected in both surveys of private sector analysts and the time horizon in which the central bank projects that the CPI will re-converge with its own long-term 3% target. Both are highly indicative of medium-term inflation expectations, which have become unanchored and very likely will begin to contaminate price formation in the coming months.

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