If the Mexican government’s anti-inflation plan turns out to be a disguised price control policy, it will have a negative impact on the market in terms of production and create a black market, JP Morgan strategists warned.
“Although Andrés Manuel López Obrador has already declared that the plan will not establish absolute price controls, it remains to be seen if it is not a price control policy in disguise,” they highlighted.
In a note sent to their clients, they stressed that the plan that the government will present to join in the fight against inflation “should not and cannot replace the cycle of (rate) hikes by the central bank.”
“It has to be a complement to successfully anchor short-, medium-, and long-term inflation expectations,” they said.
Researchers from the investment bank estimated that the 24 goods in the basic basket that could be subject to price reductions barely represent a quarter of the upward pressure on inflation.
They highlighted that there are already generalized second-order effects that go far beyond the prices in the basic basket and, consequently, they do not expect a complete effect on the objective of reducing pressure on inflation.
A pact, the option
In the analysis, led by JP Morgan’s chief economist for Mexico, Gabriel Lozano, they observed that a plan to calm inflation in a sustained and generalized way must go beyond a price control strategy.
It has to incorporate agreements with the private sector to avoid feeding alternatives into the informal economy for production, employment and prices.
“A pact is needed to soften wage negotiations by anchoring public and private sector wage growth to ex ante inflation expectations, that is, using a range of 4 to 4.2% instead of ex post levels (above 7%, where the price variation has come)”.
The firm’s experts recommended that minimum wages increase at a slower pace than the one observed in the previous two years, to limit more upside risks that could put pressure on inflation.
pressured companies
In the bank’s analysis entitled Price pact or price control?, they stressed that forcing companies to set prices can put pressure on their margins.
“Forcing companies, particularly small and medium-sized ones with little or no market power, may put further pressure on their margins after two years of little government support during the pandemic.”
Executing a pricing policy in the context of political economy considerations could result in a suboptimal strategy.
Pricing policy should not be designed to address short-term issues to avoid entering a negative feedback loop in price formation, JPMorgan strategists insisted.