It is true that inflation rates have begun to decline in many countries (including Mexico) from the multi-decade highs they reached a few months ago, but that does not mean that the central banks have finished their work, since there are still riskssuch as prices staying high for a long time, a global inflationary psychology taking hold, or a new wave of financial instability arriving.
In this regard, the Mexican Agustín Carstens, general manager of the Bank for International Settlements (BIS), commented last weekend: “High inflation could persist. And in addition to the inflationary pressures that already exist in the system, new ones could emerge. Labor markets seem to be a key flash point.” That’s how it is.
In its Annual economic reportthe head honcho of the so-called “central bank of central banks” explains that despite the more restrictive monetary policy (with withdrawal of liquidity and rise in interest rates), the last stage of the path to restore price stability will be the most difficultsince the advances achieved so far in the fight against inflation are due, to a large extent, to the relaxation of supply chains and the drop in the prices of basic products after the pandemic.
However, Carstens warns from his analysis, labor markets continue to be tight (there is a lot of demand for work) and the growth of prices in services has been more difficult to control.
There is even a material risk that a inflationary psychology (as wage and price increases begin to reinforce each other), so interest rates may need to stay higher for longer than expected by the public and investors, something that has long been the case in this space we have warned you it will happen.
The bankruptcies that occurred in the United States and Europe at the beginning of this year are the most striking sample button –but not the only one– of the materialization of said risks, since there are other vulnerabilities, such as liquidity imbalances and leverage (debt ) hidden in the non-bank financial sector (which includes investment funds, hedge funds, pension funds and insurance companies).
“If central banks have to tighten more or for longer to achieve price stability, the risk of financial stress will increase“warns the former governor of the Bank of Mexico (Banxico).
Precisely in the United States, despite the fact that there is a drop in inflation – from its peak – it is still too far from the 2 percent annual objective, as affirmed by the president of the Federal Reserve of Richmond (Virginia), Thomas Barkin, whose statements are very often used to sow clues about the future of the neighboring country’s monetary policy.
Also a member of the Federal Open Market Committee (FOMC) of the Fed, warns that demand remains elevated compared to its pre-pandemic trendand that is driving prices up even more.
If inflation doesn’t move toward the set 2 percent target, Barkin says he would be happy to implement more rate hikes.
The president of the US Federal Reserve (Fed), Jerome Powell, has left the door open for more increases in interest rates in the remainder of 2023 on at least two more occasions.
Mexico, be careful with appearances!
In the current global context, Mexico also seems to have “tamed” inflation. Banxico has put a pause on its rate hike, and unlike the Fed, there is no room for it to continue raising it afterwards, because only with the current level has it contributed to taking the peso into a bubble that keeps the exchange rate too high and inflating even more.
Thanks to that peso bubble, prices in the country have not skyrocketed, which warns –for those who want to see it– that in the future, when the upward adjustments in the price of the dollar arrive, there will be severe pressure for public finances from the debt service side and even for Banco de México itself, that will be between a rock and a hard place: continue raising interest rates regardless of the risks of bankruptcies that this will bring, or be less restrictive, in exchange for enduring an impressive loss in value of the national currency.
All the options lead to a bitter end that will catch those who believe today’s appearances that “everything is going well” off guard.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report