It’s also below the Bank of Mexico’s 3% target for a third consecutive month. As some South American peers struggle to keep prices down and developed-world counterparts from Japan to the U.S. worry that consumer prices won’t go up fast enough, the Bank of Mexico finally appears to have got inflation just right.
The recent success polishes Mexico’s credentials as the most economically orthodox country in Latin America, and one where inflation-control policies are sacrosanct.
Analysts say low and stable inflation explain in part why the Mexican peso has depreciated less against the U.S. dollar than other Latin American currencies, all of which have been pressured by prospects of imminent Federal Reserve interest-rate increases that make the dollar more attractive.
The Mexican peso has weakened 21% in the past 12 months, while Brazil’s real shrank 31% and Colombia’s peso weakened 34%. The early July data cap more than 20 years of efforts in Mexico to tame inflation, which for decades was a nightmare for policy makers.
It also illustrates the deep economic changes undertaken in the last decades. “Inflation control has become a distinguishing feature of Mexico’s economy,” said Jonathan Heath, an independent economist.
“Mexico has gone from being a country with a chaotic and politicized economic management, and skyrocketing inflation, to one that has cemented a credible monetary policy.”
To be sure, the low inflation has much to do with Mexico’s recent economic slowdown. Growth moderated in the first quarter, and recent indicators have been mixed with industrial production weakening and household consumption recovering modestly.
Many believe prices will pick up in coming months as the economy accelerates. But some economists say the legal overhauls promoted by President Enrique Peña Nieto to increase competition in the telecom sector appear to be having an effect.
Consumer prices rose just 0.09% in the first half of July, mainly due to a decline in telecommunications rates, energy costs, and other nonfood goods. Telecom prices have fallen 11% in the last year.
“To have converged towards our target is an important milestone for Mexico, particularly taking into account the complex backdrop and the weakening of the peso,” said Agustín Carstens, the head of the Bank of Mexico, in a recent interview.
Despite record-low inflation and a sluggish economy, the central bank is widely expected to start raising interest rates in September if the U.S. Federal Reserve does, to avoid further depreciation of the peso and a resulting rise in inflation expectations.
One reason behind Mexico’s success in containing prices is a central bank that gained autonomy from the government in 1994 and whose sole mandate is controlling inflation, experts say.
The bank adopted the 3% target in 2003, with a fluctuation margin of one percentage point to absorb temporary effects. Keeping prices under control has been a major achievement for a country that suffered chronically high inflation in the 1980s and the 1990s after two disastrous financial crashes and major peso devaluations in 1982 and 1994.
Inflation averaged 70% in the 1980s, peaking in 1987 at 159%. “Being a student in the 80s, I remember myself to have stood in long lines to buy basic products, such as milk, because people didn’t know how much it would cost the next day,” Finance Minister Luis Videgaray said in a recent speech.
“We’re now in a completely different country, for good”. Single-digit inflation has also helped attract billions of dollars of investment in Mexico’s flagship manufacturing and auto industries, and has created a favorable environment for midsized and large companies.
“To have stable prices is critical to me to plan my monthly and annual operations,” said Marco Molina, the owner of a midsize wholesale store in Mexico City. “It helps a lot to have a clear horizon ahead.” Still, low inflation by itself hasn’t been enough to boost economic growth.
Analysts say mayor obstacles remain: productivity isn’t growing, public and private investment were equivalent to just 20% of GDP in 2014, and bank financing to the private sector is relatively low at 34% of GDP compared with 69% in Brazil. Some economists argue that low inflation helps explain Mexico’s slow economic growth in the last two decades.
“The rigid inflation target has allowed us to reduce financial instability, but has also reduced the government’s maneuvering room to support growth,” said Gerardo Esquivel, an economist at El Colegio de México university.
wsj.com
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