Mexico’s Inflation Seen Dropping Below 5% in 2022

Upward pressure persists amid the same Covid-related risks however, according to analysts

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Mexico City — The pandemic is not over and there is still no normalization of global production processes, while the Omicron variant of Covid-19 is contributing to continued nervousness regarding the upward trend of prices, meaning the risks for inflation in Mexico this year persist, according to two of the analysts who accurately forecast the rise in prices in 2021.

Inflation in Mexico closed the year at 7.36%, with five of the country’s 28 largest financial institutions consulted by Citibanamex making the most accurate predictions of the annual figure.

Finamex Casa de Bolsa and Santander were the closest in their estimates, forecasting inflation of 7.37%, while Banco Actinver and Epicurus Investment estimated a figure of 7.34%, and Bancoppel 7.38%.

Bloomberg Línea interviewed Jessica Roldán, chief economist at Finamex Casa de Bolsa, and Enrique Covarrubias, chief economist at Banco Activer, both of whom were included in a list of the best forecasters of inflation compiled by Focus Economics 2021.

Jessica Roldán: Omicron Raises the Risks

Jessica Roldán says Finamex Casa de Bolsa projects that headline inflation will end this year at 4.18%, a forecast that factors in the Omicron variant, but also the continuation of the pandemic, which implies that prices will continue to be affected by the same shocks that were seen in 2021.

Supply shocks caused by the pandemic, the disruption of global supply chains, higher international transportation costs and an increase in energy prices are the elements that were observed last year, and will continue to exert inflationary pressure this year, Roldán says.

“We will continue to see that the shocks that affected inflation last year will continue this year, now, the Omicron issue in particular, and very specifically this variant, imposes upside risks for inflation because as long as contagion continues, disruptions will continue to occur.”

Roldán adds however that the 4.18% forecast will not begin to be seen until toward the end of the year, since between January and April inflation is still expected to register quite high levels, and following that period there could be a year-on-year reduction, and it would be toward the end of 2022 when the reduction would consolidate.

She adds that underlying inflation is estimated at 4% for this year, a level that is worrisome because, in addition to being outside the Bank of Mexico’s targeted range, it shows that core inflation will be persistent and will take time to decline because it is less flexible than non-core inflation.

Read More: Growth in Remittances to Mexico Seen Cooling in 2022

Enrique Covarrubias: Global Supply Chains Are Broken

Enrique Covarrubias says that Actinver views inflation closing this year at 4.10%, a projection that would be a drop compared to 2021 levels, but which is still high and outside the central bank’s target range.

He says that what is driving inflation are similar factors to last year; global supply chains that are broken and in need of repair, while the time it will take to return to normality will likely be protracted considering the possibility of further waves of Covid-19 amid the appearance of new strains.

Another factor that will keep inflation at levels above 4% is that markets are not functioning efficiently, he says. For example, the U.S. labor market has struggled to regain its rhythm because workers are reluctant to return to work and probably still have some savings to continue spending.

“There is a tie at the top in terms of factors driving inflationary risks, between Omicron and how quickly global supply chains return to normality, in other words, that is the risk; of course Omicron contributes to this nervousness, but it is not only the variant, but also production chains. Omicron is preventing a normalization and it is clear that this situation will continue for some time to come.”

Covarrubias says he would only adjust his inflation forecast downward if a more aggressive monetary policy begins to be seen at a global level, so the magnitude of interest rate hikes will be important going forward, but also the speed at which that happens.

How Easy is Forecasting Inflation?

The two economists agree that it has been very difficult to make economic forecasts amid such a volatile and changing environment in which it is not possible to apply the same models as in the past.

Roldán says that, behind her forecasts lies a lot of research in monitoring prices and breaking down the components of inflation to be able to change the forecast in a timely manner.

“It is very difficult, there are many shocks, it’s not possible to apply models to the times we are in, and we are constantly modifying our forecast models, and we put in a lot of judgment,” she says.

Actinver was one of the institutions that early last year anticipated inflation above 7%.

For his part, Covarrubias agrees that many of the traditional forecasting models have been broken, and when it came to predicting last year’s inflation, “we had to be very creative in these times to give an accurate forecast”.

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