Inflation in the first half of November stood at 7.05 percent, its highest level since 2001. In the interior, core inflation continued its upward trend, mainly due to the acceleration of merchandise prices. The bottlenecks observed in the production of inputs in Asia are making the country’s final products more expensive. More than 70 percent of the country’s manufacturing inputs are foreign, and many come from Asia.
Inflationary pressures are global. Most countries are suffering the post-Covid impact of production disruptions and their impact on the rise in prices of final goods. In addition, energy prices are at very high levels due to supply shocks, for example, in gas prices. These two factors are causing a headache for central banks around the world.
Thus, most of the central banks in the world are adopting less accommodative monetary policy positions. Mexico has not been the exception and has raised the interest rate throughout the year. Given the persistent inflationary pressures, especially from core inflation, it is probable that Banxico will continue to raise the target interest rate. It is worrying that medium-term inflationary expectations have been unanchored and high inflation is expected for a longer period than expected. Banxico expects inflation to converge towards the center of the target in 2023.
It is important that Banxico does not remove its finger from the line and continues with its more restrictive monetary policy stance. Although inflation comes mainly from supply shocks, it is important to contain pressure from the demand side that, otherwise, could further harm inflationary expectations. Furthermore, if we consider that the neutral interest rate is around 5.5 percent, there is room to raise the rate without adversely impacting the economy. Inflation is the most damaging tax for families, especially families with the lowest incomes, since they allocate more resources to current spending.
Lastly, it will be important for the next governor of the Bank of Mexico to be aware of the disengagement of inflationary expectations and of the need to continue restricting the money supply to mitigate greater inflationary pressures. Otherwise, we could experience the adverse effects on the currency and capital that Turkey currently suffers.
The author is CEO of GAMMA Financial Solutions and professor of Economics and Finance at EGADE Business School. He has a PhD in Finance and a Masters in Financial Economics, both from the University of Essex in the UK. He was the chief economist for Mexico at Itau BBA, deputy general director of International Financial Organizations at the SHCP and a researcher at Banco de México.