EconomyThese will be the effects of inflation, warns Jonathan...

These will be the effects of inflation, warns Jonathan Heath, deputy governor of Banxico

The wave of inflation experienced in the world will leave effects for the Mexican economy in the short and medium terms, warned Jonathan Heath, deputy governor of the Bank of Mexico (Banxico) in an interview with Expansión.

More people in poverty due to the loss of purchasing power of Mexican families, an inefficient behavior of the economy and less investment due to the distortion generated by price increases, are the effects that the doctor in economics from the University of Pennsylvania, and with 40 years of experience in the analysis and study of the economy of Mexico has well detected.

“What inflation does is that it takes away purchasing power, it introduces inefficiency in the economy; It makes investment decisions difficult and, therefore, negatively affects the economic development of the country”, he commented in an interview for which he has already been available since the first day of this month.

What effects will this wave of inflation have on the Mexican economy in the short and medium terms?
—The first and most serious thing is that the purchasing power of households decreases, therefore, the whole family does not have enough and they are buying less; this has an impact on the level of well-being of the population, it cannot allow a healthier growth in the level of household consumption.

The second is that having high inflation distorts the sufficient allocation of resources within the economy, therefore, the economy is not behaving in the best way, if not it is below its optimal efficiency level.

With inflation, some prices rise at a different speed than others, there is a distortion in relative prices, and that makes it more difficult for companies to plan to carry out their investments, therefore, it has a negative impact on investment .

Is inflation a generator of poverty?
—Definitely, because it reduces purchasing power, especially in those households that cannot defend themselves against inflation.

A family with ample resources has many different ways in which it can be protected, there are financial instruments in which it can be invested, such as Udibonos, which will always give an interest rate above inflation, etc., and building a good financial portfolio, I can beat inflation.

The problem is more than half of all countries, where households do not have access to the financial system, they are excluded, and how do they protect themselves? They have no way to do it, so those with the lowest resources are losing power purchasing power, especially those who are at the threshold of the income line that marks the difference between poverty and not, by losing purchasing power they fall below that threshold and are reclassified as poor.

You reported that Mexico would have an inflation greater than 10% without the Package Against Inflation and Famine (Pacic). Is this mainly due to gasoline subsidies? What other measures are you seeing that are helping to contain inflation?
—It’s practically because of the gasoline. We did a counterfactual exercise in which it was determined that if there were no subsidies, instead of being 8%, inflation would be 11.2%; however, that only takes into account the direct effect, it would be necessary to incorporate the second-order effects, obviously if gasoline is expensive you have repercussions on prices, it would be beyond 11.2%.

At the margin, the other measures of the Pacic could have some impact, but I think they are quite marginal.

How sustainable are these types of measures, mainly fiscal incentives for gasoline?
—This is a question for the Ministry of Finance. What the agency says is that right now it has profits from the increase in the price of oil, all those profits, due to the overpricing of what had been originally calculated, is being used to subsidize the price of gasoline and that, according to its calculations , more or less one is enough for the other.

Now, I have not made a personal calculation, it is simply the information that I have.

Banxico started raising the reference rate last year, how have the hikes helped contain inflation?
—We would have to have some counterfactual exercise that we do not have and it is very difficult to construct it.

I would say that, intuitively, if we had not started to increase the rate, we would have been sending the message that the Bank of Mexico does not care about the phenomenon of inflation, and that this would have had the effect of higher inflation expectations, so that the rates medium and long-term interest rates could be above what we see right now.

After increases of 25, 50 and now 75 basis points, we are in the middle of the neutral zone, what we need to do is continue to increase the rate, so as not to have a neutral position, if not a restrictive one consistent with the inflationary scenario that we are observing, I do see the need to continue increasing the rate.

How can we combat inflation?
—The first factor is our monetary policy, this must be consistent with the inflationary outlook, have a restrictive stance to contain expectations and try to contain inflation, not solve it; monetary policy alone is not enough for us, but it is what it is.

The second thing that helps is the Pacic with gasoline subsidies, instead of having an inflation of 11%, we have it at 8%, that does not solve the inflationary problem, but it helps to contain it.

The third and most important, but outside our side, is the monetary policy of the United States. Much of the inflation that we import comes from there, where it is above 9%, and the Fed maintains an expansionary stance, we need it to continue increasing its rate for a restrictive stance, this is a necessary condition, but not sufficient, for we can see a downward trend of inflation in our country. And not only from the Fed, it is a global effort, from all central banks, we need a global restrictive stance.

The last one, is something that I have baptized as patience and luck. We need luck because for inflation projections to come true, what we need is no longer to have unanticipated shocks, that’s where that element of luck comes in, hopefully we don’t have them, but we can never anticipate the future; if there is going to be another invasion of another country, or who knows what is going to happen.

Finally, the patience part, because I can assure you that sooner or later the inflationary rebound issue will be resolved, its initial cause, which was the disruption in supply chains worldwide, due to the pandemic, sooner or later. they are going to be solved, to be recomposed, the problem is that we do not know if this is going to take a long time, or a little, but what we do know is that it will eventually be resolved.

The interview with Deputy Governor Jonathan Heath was held on July 14, 2022 and is part of the special report published in the most recent edition of Expansión magazine: México Caro.

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