Price controls to contain inflation

The voice of alarm from INEGI of an inflation of 7.7% for consumers and close to 10% for producers, being much higher in the products of the basic basket, has rightly raised all the alarms. Not even the increase in the interest rate to 6.50%, which could reach 8.50 by the end of the year, and the Fed’s rate hike have been of any use.

Inflation is multicausal. Inflation can be defined as the battle waged by income recipients (entrepreneurs, the State, workers). To an increase in wages by one of these groups, the others do the same and there is an increase in prices. Historically, inflation in Mexico has responded more to the government deficit, which has been covered with money from the Bank of Mexico. For this reason, the constitutional autonomy of the Bank of Mexico and its mandate to maintain the purchasing power of the currency at the time of Salinas was crucial. Since then, we have lowered inflation levels close to 200% to sub-double-digit rates. The increase in prices that we drag has not yet reached double digits.

Where does the increase in prices in our economy come from? We live in a globalized economy, where what one country does affects the others. In our case, we are very affected by what happens in the United States. Biden flooded the US economy with trillions of dollars so that it would not collapse, and had an immediate increase in inflation, which exceeded the figures reached in the 1970s and 1980s and transmitted this trend to Mexico. In our case, the rise in prices has not had its origin in the management of the Mexican economy. In fact, Banxico has significantly increased rates to reduce inflation much faster than in the United States, but the effects have not yet been noticed, despite the fact that this may have a recessive effect.

To reduce the loss of purchasing power of consumers, it has been heard that AMLO has asked his economic cabinet to start talks with producers or importers of basic products to encourage them to reduce their price increases. There is even talk that a price control could be ordered in around 25 products to contain inflation.

Price controls can be used on a temporary basis, when they are accompanied by other measures. In Mexico, in addition, to carry out the same, it is required that they are basic products, that the Executive issues a decree published in the Official Gazette indicating the affected products and a declaration of lack of effective competition from the Federal Commission of Economic Competition. . The traditional thing has been that our authorities dictate these controls without waiting for or even requesting the opinion of Cofece. Companies can protect themselves, but because they are considered to be of public order and social interest, provisional suspension is not usually granted.

On the other hand, if the authority dialogues with the producers to reach price agreements, it is becoming an accomplice so that they incur in absolute monopolistic practices of price agreements. In our economy these must be set by the market, by the interaction of supply and demand, which, just as it can drive them down, can also push them up. What is not valid is betting on the market model when prices go down and forcing prices to be controlled when the market takes them up.

Mexico has a strong tradition of price controls or agreed prices between the productive sectors since the 1980s, especially during the time of President Miguel de la Madrid. Almost all of them were unsuccessful, except for the Solidarity Pact, implemented by Salinas de Gortari, which used all kinds of orthodox and heterodox tools to effectively lower prices, managing to lower inflation to one digit in a short time. Now it is more difficult to lower it because the increase is due to a global rise in prices, the influence of the United States and the war between Russia and Ukraine. It should not be forgotten, as happened in the neoliberal period, that low inflation is not the only purpose of macroeconomics, as happened with neoliberal governments. Control of inflation must be combined with economic growth and low unemployment. The problem is that in Mexico we have reached the worst of situations: stagflation, stagnant growth with rampant inflation.

How to get out of this problem? What is clear is that price controls or illegal price agreements would only lead to a temporary decrease in prices. Ramírez de la O and his economic cabinet must display better skills to combat it. Or else the grievances could increase in the face of the 2024 elections. If not, ask Biden, where the increase in the economy has not been enough to reduce his popularity to historical lows.

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