Apparently, the downward trend in inflation continues to consolidate in our country. The peak of this inflationary process in Mexico was reached in the month of August when the general inflation reading was at 8.70 percent.
the immediate month, September, inflation remained at the same reading of 8.70 percentstill very high, but with the good news that it stopped its upward run that month. For October inflation dropped to 8.41 percent per yearwhile the most recent figure corresponding to the month of November indicates that this same indicator of inflation was located at 7.80 percent per year.
With the decline in inflation, the bases could be laid so that our central bank no longer raises the interest rate, at least that would be an expectation, if we consider that the justification for the interest rate increases is due to the fact that the inflation increased.
But, the expectation tells us that the Bank of Mexico (Banxico) will raise its interest rate again this month before the end of the yearperhaps the positive news would be that the upward adjustment of Banxico’s reference rate will be less than the other increases it made this year.
Banxico is expected to raise its interest rate by only 50 basis pointsless than the 75 base points that adjusted the rate this year on 4 occasions.
Why, if inflation goes down, does Banxico not stop raising the interest rate? Isn’t that a contradiction of our central bank?
Let’s try to explain in the simplest possible way the justifications that Banxico has to raise the reference interest rate.
First proof: Double inflation
Suppose your doctor told you that you are 30 kilos overweight (to say a number) and, for this reason, you must undergo a diet to lose those extra kilos. This process begins with some stability, manages to stop gaining weight and that is already good news (in the case of inflation it would be the equivalent of it no longer rising). In the second step you start to lose weight. The first month he loses 5 kilos and the second month another 5 kilos. This is undoubtedly very good news, but you are still 20 kilos overweight, the goal has only been partially achieved, you must continue to follow the diet to reach the goal of 30 kilos.
Banxico came to register an inflation rate of 8.7 percent when the target is 3 percent per year and a maximum of 4 percent, already considering the margin of tolerance of plus/minus one percentage point.
This means that the headline inflation that we met this Thursday, at 7.80 percent, is still more than double the general target rate of 3 percent, 2.6 times to be exact, as well as 1.95 times if we measure it with the margin of tolerance. There is no reason to think that Banxico should stop raising rates, although inflation has come down, it is still “intolerably” high. It is like saying that because the patient lost weight they should stop the diet, the risk to their health due to a “rebound” is very high.
Core inflation, big threat
There is an indicator, that of underlying inflation (prices that are not subject to decisions of an administrative, seasonal or high volatility nature), which shows the trajectory of an indicator such as inflation more clearly and forcefully.
If headline inflation, which includes all types of products, goods and services, moves downward, but core inflation remains unchanged or, worse still, increases, then we have bad news.
How is Mexico in terms of core inflation?
The figure for the month of November shows that core inflation was 8.51 percent; For starters, this rate is much higher than the general rate of 7.80 percent, certainly bad news.
If we consider that core inflation was at 8.05 percent when the headline inflation rate peaked last August and September with readings of 8.70 percent, then the bad news gets worse. Core inflation, which does not consider volatile prices, not only remains high but is even higher than a few months ago.
For these two reasons: the fact that the country’s general inflation is still practically double the target of the central bank, plus an upward performance of core inflation, it is impossible for Banxico to abandon its campaign to raise interest rates. interest.
So, surely Banxico will be criticized and will be required to stop raising interest rates because there is no justification anymore because inflation is going down. The truth is that the task of the Mexican central bank to return inflation to tolerance ranges is far from over.
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