Mexico & Nafta - November 2006 ( ISSN 1741-444X)

The annual inflation rate jumped to over 4% in September, according to figures released by the Banco de México on 9 October. Then, on 24 October, the central bank released figures for inflation in the first half of October that showed the annual inflation holding at over 4.4%: the actual rate of price rises for the first two weeks of October was 0.28%. An annual rate of 4.4% would be a bit outside the central bank's target of an annual rate within one percentage point of 3%. The central bank argued, and we concur, that volatile fresh food prices were the main reason for the surge in inflation, so rates would fall once supplies of fresh food reverted to normal.

The main reason for the sharp rise in inflation in the past six weeks has been the damage hurricanes have done to the tomato crops in Sinaloa. This has led the shortages of tomatoes, which have a high weighting in the inflation index, and this phenomenon pushed up in the overall rate. The shortages have prompted a 76% jump in tomato prices in the past six weeks. This accounted for 40% of the rise in overall inflation in September. 

So the fact that the September monthly rate, 1.01%, is the highest since December 2000, should not worry the financial markets too much. Besides problems with tomato supplies, the inflation rate has been pushed up by higher sugar and tortilla prices. 

Sugar prices should fall as the new crop is harvested: the government has also contributed by easing restrictions on imports. On 11 October the economy ministry mid-wifed a deal between sugar producers and users to lower sugar prices. In exchange for the government agreeing to limit imports of sugar, domestic producers agreed to offer easier terms to sugar users. The government had authorised imports of 267,606t of sugar to lower prices in the domestic market. Earlier, on 5 October, the government authorised the importation of 500,000t of fructose from the US for the 12 months to 30 September 2007. It also said that the country would import a further 250,000t in the final three months of 2007. 

Tomato prices should fall further, especially if the US demand for Mexican tomatoes in the US winter is weak. The more substantial worries about Mexican inflation derive from the jump in prices in the services sector. This trend seems to be changing: the only substantial jump in the services sector price in September was in the education sub-sector. This sector, however, always rises sharply in September as most children return to school. Overall, however, the rate at which prices of services were rising eased in the past three months. 

The central bank claimed that the jump in September inflation was nothing to worry about. It points out that its index of underlying inflation, which strips out volatile fresh food prices, rose by only 0.3%. This index is still running at under 3.5% for the 12 months to September. Indeed, annualising the underlying rate for the first half of October gives an underlying rate for the past 12 months of 3.45%. This is bang in line with the central bank's target. What the central bank figures do show is that manufacturers are under pressure. The central bank's index of producer prices rose by 6% in the year to September. 

Guillermo Ortiz, the governor of the Banco de México said, on 10 October, that inflation would continue to be comparatively high in October and November. He said that the central bank's forecast for inflation of between 3.5% and 4% were under review. 

Demand in the economy is easing. In August retail sales were up by 2.9%, significantly below what economists had expected. The consensus was for a rise of 3.5%. This weakish domestic market, coupled with lower US demand for Mexican exports, is likely to mean that the growth rate in the final quarter of the year will be the lowest of the year.

Growth: In August, the economic activity index (IGAE) rose by 4.3% year-on-year. The IGAE is a proxy for GDP growth. The August figure is pretty good, as it includes a considerable fall in agricultural output, (of 4.9%, year-on-year). In July, agricultural output was up by 5%, year-on-year. The August figure was lower than the consensus forecast of 4.5%, and well down on the average rate of growth in the six months of 2006, which was 6%. The more economically important sectors of industry and services are both doing well. Industry grew by 5.8%, thanks to a strong (7.3%) growth in construction. Manufacturing output was up by a healthy 5.6%. 

Remittances: In the first eight months of the year, remittances rose by 20% year -on-year to US$15.51bn. In August, remittances came to US$2.1bn. In 2005, they came to US$20.0bn.

Poverty: The latest poverty figures, from the Consejo Nacional de Evaluacion de la Politica Social (Coneval), which is based on what people tell the Inegi researchers who compile the national survey of household income and expenditure, should worry the incoming government. The Coneval found that the number of households in poverty increased in 2005 compared with 2004. Coneval drew the urban poverty line at households with incomes of less than M$1,586 (US$145.50) a month. The rural poverty line is income below M$1,060 (US$97.2) a month.

The 2005 rise in poverty broke eight years of continuous falls. The number of households who said that they were mired in poverty was 10.178m in 2005, up from 10.15m in 2004. As the data is based on interviews, rather than an objective analysis of returns, the change is not statistically significant. More worrying for policymakers is the fact that extreme poverty affected 3.6m families in 2005, up a thumping 2.2% on 2004. The extreme-poverty line is drawn at M$790 a month in urban areas and M$584 a month in rural areas. People with incomes at these sorts of levels cannot feed themselves and their families adequately. Around 19m Mexicans fall into this category. 

The rise in extreme poverty is odd because the economy was recovering in 2004 and the number of people in proper (ie social-security paying) jobs rose for the first time since President Fox took office in 2000. What makes the 2005 data odder is that even the sluggish growth years of 2001 and 2002, the number of households which said that they were poverty stricken fell. What seems to be happening is that the pick-up in the economy did not have much effect on the rural population. Indeed the number of households in rural areas saying that they were poverty-stricken increased by 5.2% while the number of urban households in poverty fell by 4.7%. 

Most economists agree that the two main anti-poverty programmes over the past eight years, Progresa, under President Ernesto Zedillo and Oportunidades, under President Fox, have been effective. Since 1992, poverty levels have fallen from 54% of households to 47%. Where these programmes have been least effective is in reducing the number of people in extreme poverty. In percentage terms the number of people in extreme poverty has fallen by only 4.7% in the past eight years. In 2005 the proportion of the population in extreme poverty increased by 0.8 of a percentage point.