What is inflation in Mexico and how does it affect you?

AMLO indicated that there has been a decrease in inflation in Mexico; but, the impact on essential products has increased, thus the burden on households continues to be the same.

What is inflation in Mexico and how does it affect you?
The appreciation of the Mexican peso will help to contain inflation. Chili prices are shown in the market. Photo by Reiseuhu / Unsplash

Through President Andrés Manuel López Obrador's (AMLO) morning conference, the President announced that inflation in Mexico had reached its "maximum point" and that the last record indicated a decrease to close the month of September, thus encouraging the Mexican population to celebrate the news.

It was the National Institute of Statistics and Geography (INEGI) that corroborated the data, as the National Consumer Price Index (INPC) had a very slight decrease of 0.06% concerning the last 15 days of September, as it went from 8.76% to 8.70% at the close of the month.

Despite this report, INEGI announced that tortillas, tomatoes, and onions had registered price increases of 2.09%, 11.63%, and 11.37%, respectively; therefore, one of the doubts among the population began to revolve around how inflation affects citizens in Mexico.

What is inflation and how is it measured in Mexico?

The word inflation is a term that everyone has heard more in these times of change, however, not many know what it is and what impact it has on Mexico's economy, as well as on the pockets of housewives.

What is inflation?

Inflation is the generalized and sustained increase in the prices of goods and services in the domestic market during a certain period. When there is high inflation, the consequence is that for each Mexican peso, fewer goods and services are acquired. In other words, inflation reduces the value of the currency over time.

According to the Bank of Mexico (Banxico), when there is inflation in an economy, it is very difficult to distribute our income, plan a trip, pay our debts or invest in something profitable, since prices, which were a reference to allocate our money, are now distorted.

When inflation increases, we realize that the amount of money that we were managing some time ago, is no longer enough to buy the same as before, and this affects us all: housewives, employees, producers, savers, investors, entrepreneurs, etc.

Why do products increase in price in Mexico?

One reason is that when a product becomes more abundant in the market, its price falls relative to other goods and services; however, when it becomes relatively scarcer, its price increases.

Under normal circumstances, the relative prices of goods and services in an economy change constantly, as they are set depending on the quantity demanded and offered in the market where they are traded, and whether they are seasonal.

An example of this could be that an umbrella costs one hundred pesos when it is not the rainy season, while a T-shirt costs two hundred pesos. However, in the rainy season, people will buy more umbrellas, so they will increase in price, becoming more expensive relative to the t-shirt.

The only thing that changed was the relative price between the two products, given the increase in demand for umbrellas.

How is inflation measured in Mexico?

Several causes could trigger inflation, however, the main factor according to the Bank of Mexico (Banxico) is mainly due to the excess of money circulating in the hands of Mexicans who, feeling they have more economic resources, increase their spending, generating greater demand for goods and services.

A frequent measure of inflation is the National Consumer Price Index (Índice Nacional de Precios al Consumidor), which is calculated by the National Institute of Statistics and Geography (INEGI) and corresponds to the percentage per year of the general variation of prices in a given period.

The Institute measures inflation in Mexico, tracking 235 thousand prices around 46 cities in the country, taking into account how much is spent on them, to know which items are the most important in the consumption of Mexican families.

The INEGI Index compiles information on inflation and publishes its results on a biweekly and monthly basis. With this information, the Bank of Mexico implements the necessary measures to control inflation, since it is in charge of regulating the amount of money circulating in the country.

How do external factors impact inflation in Mexico?

Currently, inflation in all countries around the world has been affected by several factors, among which the following stand out:

The SARS-CoV-2 pandemic and the confinements that started in 2019.
The special military operation was ordered by Russian President Vladimir Putin in Ukraine.

The conflict between Russia and Ukraine impact is also present in global inflation, as both countries are major exporters of wheat and fertilizers, as well as other raw materials.

The conflict increased the prices of these raw materials and further slowed down production chains, which were already suffering from bottlenecks caused by the Covid-19 pandemic.

In other words, as Mexican companies begin to perceive the price increases in their raw materials, they will likely begin to increase their final costs to Mexican consumers.

Mexicans and inflation

The perception of a large number of Mexicans about inflation in Mexico is that it is not measured properly and is not real, since it is believed that every time we go shopping we acquire fewer goods and services.

For those of us who earn our income through a salary or wage, every year that the minimum wage -which is taken into account for most of the increases- increases, not only do we not feel it, but we realize that we cannot recover what we have lost during the year with the increase in prices.

One of the greatest difficulties in correctly measuring inflation in Mexico is the great difference in household consumption habits, due to the economic, cultural, and social differences between cities, municipalities, states, and the Mexican Republic.