Inflation and the Cost of Living in 2016
By Jade Arroyo
With the beginning of the New Year, inflation inevitably arrives, and along with it the cost of living increases. It is always useful to know average market prices and have an overview of the stock market, especially to cope with the costs of post-holiday debt in January.
Mexico, like the rest of Latin America, has suffered from political and economic instability, coupled with the global, economic, and climate crisis, as well as the rising of the US dollar against the peso, resulting in higher prices for commodities. However, not everything in the forecast is pessimistic. The government has promised to lower gasoline prices since last year, aiming to achieve higher economic growth in 2016 and curb inflation. Atención presents abroad overview of life and fuel costs and inflation in Mexico.
Increase in the minimum wage
The Council of Representatives of the National Minimum Wage Commission (CONASAMI) unanimously agreed to increase the minimum wage by 4.2 percent for 2016. In this way, with a unified minimum wage across the country, the basic salary in 2016 is 73.04 pesos a day.
The increase was estimated based on the estimated inflation rate of 2 percent, according to the Bank of Mexico (Banxico), which means that the purchasing power of the minimum wage will have a recovery of 4.8 percent and the food basket 4 percent, more than double inflation, according to forecasts. Although the minimum wage has been unified throughout the Republic (it was previously divided by geographic area), the state of Guanajuato has always been among the states with the lowest pay, this is a situation that still exists in many businesses and places of work.)
The basic food basket
Prices of basic foods have risen since October 2015 due to adverse weather and its impact on the supply of sugar and palm oil, according to the United Nations Food and Agriculture Organization (FAO).
The index of food prices by by FAO is a weighted index based on monitoring trade in the five main groups of basic food products in international markets: cereals, meat, dairy products, vegetable oils, and sugar.
The increase in basic food prices has seriously affected Guanajuato families, especially those with limited resources since, according to housewives, the wages paid are less than enough to buy basic foods. And in the last couple of months (since late November), the price of products such as rice, eggs, tomato, beans, chili, and milk has risen between one and four pesos per kilo. “There seems to be little increase in prices, but five pesos here and there make a big difference in your final bill and there is no longer enough to buy anything. Before I stocked my pantry with 500 pesos, but now I spend up to 700 pesos to buy the same things… . I do not buy the same anymore. I have to buy less,” said Mrs. Santi Gómez.
This situation could become even more difficult due to the possible increase in tortilla prices if the price of LPG goes up in the second quarter of the year. If so, the cost of the staple food of our diet could rise from 10-14 pesos per kilo today to 18 pesos.
In November 2015, members of the Federación de la Masa y la Tortilla (Federation of Dough and Tortilla) signed a collaborative agreement with the state government, to standardize the price of a kilo of tortillas in Guanajuato at 10 pesos. The governor has asked consumers to buy local products, focusing on corn tortillas. With the boosting of local production, the product can be maintained at 10 pesos in the long term. This campaign is called “Buy Made in Guanajuato” and is being promoted by Governor Márquez Márquez. “This is to standardize product quality and guarantee the supply of dough to the tortilla industry, especially for masa and tortillas made in Guanajuato state,” said the minister of Economic Development. Still, this campaign needs to be totally implemented and homogenized throughout the state of Guanajuato.
Oil and gas
The oil price was again affected. The price fell to the lowest since 2004 at 32.10 pesos a barrel, while Mexican crude oil settled at 24.75 pesos a barrel, a level that may already be below the cost of production.
In 2016 it was announced that the pricing of gasoline would be lowered. In this sense, the IEPS (Special Tax on Production and Services) ceased to be variable and became a fixed tax rate that would be adjusted annually, corresponding to inflation, in 2016.
As a consequence of the above, Magna gasoline, for example, will have two taxes: one for weight and another at 4.16 cents per liter. The first will go to the federal treasury; the second, to the states and municipalities under the terms of the Law of Fiscal Coordination.
However, the IEPS is not what defines the price of gasoline to consumers. During 2016 and 2017, there will be a hybrid system based on two taxes determined by the Secretary of the Treasury.
The IEPS provides a double mechanism to fix the price of gasoline for consumers. The first is a band of minimum and maximum values that will work as a guarantee for both the federal government and consumers, so that prices do not exceed certain ranges.
For example, if during 2016 the minimum price for gasoline were 11 pesos and up to 15 pesos per liter, the price at which the consumer would buy could not be less or more than those values. According to Banxico it is appropriate and relevant that in 2016 gasoline prices rise more than 3 percent, as it limits the upward pressure on the inflation system. The current peso gas prices per liter are: Magna 13.16, Premium 13.98, Diesel 13.77.
Currencies and inflation
Meanwhile, the exchange rate has reached a new record high of 18.03 pesos per dollar. “An increase in the exchange rate of the peso against the dollar could have implications for inflation as there are imported goods that could record highs,” said the president of the Confederation of National Chambers of Commerce, Services and Tourism (CONCANACO), Enrique Solana Senties.
He said that we must be aware of what happens to the exchange rate because if we don’t, it is not very likely to remain at 18 pesos per dollar, and there are other factors that could complicate the year. However, in these first weeks of the year, there are sales and clearance merchandise because traders want to eliminate inventories, and there’s the drop in gasoline prices and electricity tariffs.
“I do not mean that the year is going to be easy. I see it as complicated,” Solana said in his message to mark the start of 2016. He explained that in the coming weeks he is to meet with the head of the Tax Administration Service in order to develop plans to move more informally and push the tax regime, collecting more taxes from the public.
Historically, he said, the first week of January is characterized by low trading volume, but in 2016 volume quickly reactivated, as a result of which companies have reacted to the increase in the exchange rate. Despite the depreciation of the peso and the situation of Chinese imports, it is expected that the Mexican economy in 2016 will show a slightly higher increase than in 2015, since Mexico shows a higher correlation with the US economy, which is expected to grow this year by about 2.5 percent.