Inflation and the temptation to regulate prices

The year is about to end and the economic outlook looks uncertain, due to the convergence of events of various kinds in the international and domestic spheres, which are seasoned by the circumstance of the new strain of COVID.

The economic phenomenon that draws the most attention at this juncture is the inflation outbreak, which is experienced equally in developed and peripheral economies, with few exceptions. The reasons are diverse and have to do with the impact of supply chains, higher energy prices, the boost to public spending in the main economies and shortages in certain sectors.

Mexico will end 2021 with inflation of around 8 percent, which has already prompted a reaction from the central bank to raise interest rates. Inflationary reports indicate the existence of increases much higher than the average of the INPC, in various sectors. The increases in agricultural products such as tomatoes and tomatoes, close to 150 percent, stand out for their daily routine.

In the face of the barrage of price increases, statements have emerged about the need for the authorities to intervene to stop such increases. Last July, the federal government began applying measures to control the price of LP gas. This action, of doubtful legality, as I have indicated on previous occasions, has not been accompanied by measures at the three levels of government to remove restrictions on the entry of new players.

Now statements are made regarding the need to regulate digital transportation platforms in Mexico City, particularly Uber and Didi. And it is intended to carry out a review of the regulation of the industry, as if it were concessioned public transport, such as taxis or minibuses.

Years ago, COFECE issued a recommendation to local authorities, in which they were urged to allow the operation of those digital platforms that allowed the expansion of transport options to consumers, as this is aligned with the efficient operation of the markets, which is a constitutional mandate to which the actions of the authorities should adhere.

Now, with the argument of protecting the popular economy, a threat of intervention looms in an industry that, although not perfect, has come to revolutionize mobility in Mexico City and has become a valuable option for the users, especially in the context of the operational deterioration of traditional transport services, caused by the lag in rates with respect to the evident increase in costs.

The imposition of maximum prices on unregulated services will lead to a deterioration in their quality, but it will also be an illegal measure, since there are no powers in the different levels of government to establish maximum prices.

As I have pointed out on other occasions, arbitrary price regulation is a measure that was eradicated almost 30 years ago, when the Law on Attributions of the Federal Executive in Economic Matters was repealed. Since then, the fixing of maximum prices has been applied after a declaration by the economic competition authority, although in the case of LP gas, it was decided to ignore the procedure.

Governments would do wrong to try to combat price increases with the use of regulation. Regardless of the illegality of the measure, the interference of the authority in the setting of private prices always generates distortions and in the long run inhibits investment and problems of insufficient supply arise. But above all, the use of the inflationary conjuncture to intervene in innovative industries that have so far escaped the control of traditional power groups should be avoided.

* Consultant for Ockham Economic Consulting, specialized in economic competition and regulation and university professor.

Twitter: @javiernunezmel

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