Inflation: collateral effect of the pandemic

After more than 18 months since the Covid-19 pandemic was declared, Mexico City and several other states of the Republic are currently on a green traffic light. There are several signs that possibly the most serious effects of the pandemic have been left behind, but what are the collateral effects that exist and will continue to be seen in the economy? Perhaps the most important of all, is inflation.

Starting with the behavior that demand has had, in the second and third quarters of 2020, the consumption of goods and services decreased significantly, this was due to social distancing measures and the lack of certainty regarding economic activity. By the end of that year, vaccination campaigns began in developed countries, as a consequence the distancing measures decreased and the economic expectations of consumers improved, this translated into a significant increase in demand. To these effects we must add the injection of liquidity generated by the social support programs. In Mexico, the demand for goods and services followed the same growth path in the first and second quarters of the year.

On the demand side, the pandemic caused several links in the production chains to break. Many factories stopped working at their customary level and even many workers, in developed countries, decided not to work because government aid substituted their salaries and the risk of contagion was high. The real economy ran into several “bottlenecks” that reduced the supply of consumer goods. One of the most cited examples is the car production chain, halted by a shortage of chips.

The effects of an increase in demand and a decrease in supply cause prices to increase, this increase not only occurred in final goods, it was generated from the prices of raw materials, therefore, the total effect has been inflation that had not been seen in decades.

The case of Mexico is not different from what is happening globally, the increase in the prices of raw materials and in particular of energy, has generated a general increase in the prices of the basic basket. Inflation forecasts for this year have constantly increased, there are analysts who see 6.70% as a possible level (average survey of analysts 6.31%)

Currently the debate is centered on whether the price increase will be temporary or if it will be long-term. The monetary policies applied by the central banks will depend on this. For its part, Banco de México has shown broad concern about price increases and as a measure to combat it, it has increased the interest rate steadily in the last three meetings and is expected to continue to do so given future expectations.

One consequence of the rate increase will be to slow down the dynamics of the economy, which is not convenient given current conditions. Governments and central banks already have in view the following problem to solve: low economic growth with high inflation rates, which is known as: Stagflation

Taking these factors into account helps you make investment decisions to keep your personal finances healthy. Investment funds are available to everyone and are adapted to the needs and objectives of each individual, in addition, in some cases, the resources can be made available at the time they are required, because as is well known, “money does not it grows under the mattress ”.

* The author is VP Structured Products of BBVA Asset Management.

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