Global inflation, at its turning point; in Mexico missing: Banxico

Everything seems to indicate that international inflationary pressures have already reached a turning point, agree former central bankers as well as analysts from Citigroup and Credit Suisse.

They point to the decrease in international freight prices and the better functioning of world production chains, as the factors that have released the world shocks that since 2020 have kept inflation under upward pressure.

However, even coinciding with the diagnosis, the director of Economic Research at Banco de México, Alejandrina Salcedo, warned that the shocks that have driven inflation are very deep, long-lasting, and atypical.

“Therefore we cannot be certain that they have been resolved.”

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When participating in the Economic Perspectives Seminar of the Autonomous Technological Institute of Mexico (ITAM), the Banco de México expert said that there are still very clear challenges such as core inflation that is still very high and without showing clear signs of a reduction, the same as the pandemic that has not been fully resolved and the war in Europe.

Our forecast is that general inflation already reached its peak in the third quarter of last year and by the fourth, we will see a reduction”.

The official also identified the mitigation of some external shocks, such as the decrease in freight prices and the better functioning of global production chains. But, as the Governing Board has done, she pointed to core inflation as an element of concern due to its persistence and the high level where it is.

signs of fall

In another session of the same seminar, the former governor of the Bank of Mexico, Alejandro Díaz de León, pointed out that the world experienced “an excess of post-Covid anesthesia” where countries tried to avoid a depression and maintained the stimuli even last year. He acknowledged that value chains are being reorganized and freight prices are under less pressure. From his perspective, inflation has already reached a tipping point.

Guillermo Ortiz Martínez, governor of the Bank of Mexico from 1998 to 2010, participated in the same seminar and observed that “there are clear signs that world inflation is falling.”

He referred to the prices of raw materials, the restoration of productive sectors, the opening of China, and the fall in jobs in the United States.

Ortiz warned that there is a risk that both the Fed and Banxico make a mistake in assessing inflation pressures and maintain the restrictive position of monetary policy to try to recover lost confidence.

Meanwhile, the chief economist for Latin America at Citigroup, Ernesto Revilla, estimated that inflation will register an annual variation of 4.77% at the end of 2023, from 7.85% projected for all of 2022.

The chief economist for Latin America at Credit Suisse, Alonso Cervera, projected that inflation ended 2022 at 7.9% and would be 5.2% at the end of this year.

Inexperience in Fed and Banxico; risk in recessionary phase: Werner

We see an important lesson from the failure in the Fed’s initial diagnosis regarding the transience of inflation: without technical or historical experience on the part of decision makers, a very great risk is generated in the direction of monetary policy, warned Alejandro Werner, former director of the Western Hemisphere Department at the International Monetary Fund (IMF).

From Washington he pointed out that “in Mexico we have a significant operational risk (in the Governing Board of Banco de México). When we enter moments of turbulence, where technical analysis basically has to be combined with value judgments based on the experience of decades of seeing these supply and demand phenomena, it is where the deterioration and technical quality of the experience that the Board of Directors has Government can be a big risk,” he said.

When participating in the annual seminar of the Autonomous Technological Institute of Mexico (ITAM) on Economic Outlook 2023, he paraphrased the risk that he pointed out in the composition of the current Governing Board of Banco de México.

We are flying with a pilot and co-pilot with very little experience in monetary, financial and fiscal matters, when we are in a period of turbulence.

Reserve made historic mistake by delaying rate hike: Ortiz

“The Federal Reserve made a historic mistake” by maintaining the monetary stimulus and low rates because it considered the shocks that had been putting pressure on inflation since 2020 to be transitory, said Guillermo Ortiz Martínez, former governor of the Bank of Mexico.

He predicted that “very likely they will be wrong again by continuing to increase and maintain high rates generating greater damage, but vice versa.”

At ITAM’s annual seminar on Economic Outlook 2023, he stressed that “interest rates in the United States will most likely rise to levels we have not seen in decades and there will be no reductions before 2024, as they will try to re-establish their credentials.”

He commented that Fed officials explained to him that their models to estimate inflation were based on supply issues. “The model failed them because they did not incorporate the demand pressures that were being generated by the unprecedented monetary and fiscal stimuli that were applied in the United States, which were also putting pressure on inflation,” he highlighted.

And while acknowledging in November 2020 that inflation might not be a transitory phenomenon, the Fed waited five more months to start its rate hike cycle, until March 2022. and “we can expect them to be more dovish now in the recessionary phase.” that they induced.

ymorales@eleconomista.com.mx