Monday, October 2, 2023

Inflation will slow down, but its regressive effect continues

Inflation Will Slow Down, But Its Regressive Effect Continues

Inflation in December 2022 closed at 7.82%. In its monthly comparison, inflation had a slight rebound, prices were higher by 0.38% compared to November. With this, the year ended with the highest inflation in a December in more than two decades. Such a price increase has not been seen since December 2000, when it was 8.96%.

Since the third quarter of 2021, inflation is outside the target range established by the Bank of Mexico (3% +/-1%). Throughout 2022, inflation remains above 7%. Although inflation showed signs of slowing down at the end of last year, the lack of food products continues, causing the purchasing power of low-income households to be affected to a greater extent.

Low-income households are the most affected

Inflation Will Slow Down, But Its Regressive Effect Continues

The Mexican Institute for Competitiveness (IMCO) analyzed the differences between the consumption patterns of Mexicans and the proportional increase in spending faced by households as a result of inflation, which differentiates according to the level of income, and found -an increase in the prices of goods and services affects households that receive lower incomes.

The above is mainly due to the fact that households with low income allocate a greater part of their spending to the purchase of food, which is exactly the thing with the biggest increase in prices. In particular, low-income households spend half of their total spending on food, beverages and tobacco. In contrast, high-income households dedicate only 28% of their spending to purchasing these items.

For example, a household with an average monthly income of $3 thousand pesos (which is part of the first income decile) spends more than 10% of its expenditure on buying bread, tortillas and cereals, while a household with a higher monthly income. At $54 thousand pesos (part of the 10th decile) they spend less than 3% of their income on it. Therefore, the inflation of more than 12% sustained by these products throughout 2022 most affects the purchasing power of those who dedicate a greater part of their income to the purchase of these food products.

Inflation Will Slow Down, But Its Regressive Effect Continues

As a result of these differences in the distribution of spending among low-, middle-, and high-income households, the increase in the cost of the average consumption basket is greater for low-income households since mid 2021.

In December 2022, there will be an annual increase of 7.72% in the prices of the average basket of consumers among those in the 10% of the highest income households in the country (households in the tenth decile of income ); This rate is lower than that observed in the general inflation of the country (7.82%). However, for the 10% of households with medium-level income (fifth decile), the increase in prices was 8.73%. The increase is even greater for households in the first decile (the 10% with the lowest income): the cost of their average consumption basket increased by 9.70% per year in the last month of 2022. The difference between The inflation rate faced by low-income households and that faced by high-income households is 1.98 percentage points.

This gap is smaller than that observed in September 2022, but larger than that observed in December 2021. In the last month of 2021, households in the 10th decile (highest income) face inflation of 7.12%, lower than the annual inflation of 7.4% registered during that period, while households in decile 1 (lowest income) registered a price increase of 7.99%. In other words, there is a gap of 0.87 percentage points between the level of inflation faced by the highest and lowest income households.

Inflation Will Slow Down, But Its Regressive Effect Continues

With inflation continuing to rise in the first months of 2022, the gap between inflationary pressure for low- and high-income households has also widened. In other words, in addition to the increase in inflation, it is observed that the difference between the increase in costs faced by low-income households and that faced by high-income households is widening: between July and October 2022, the household in The The first decile recorded annual inflation rates of more than 2 percentage points higher than those observed in the previous decile.

At the end of last year, inflation showed signs of slowing down. In the last three months of 2022, the annual inflation rate is less than in previous months. With this, since September – when the inflation faced by the expenditure of low-income households was 2.53 percentage points higher than that of high-income households – the gap in the negative impact of the power of purchase of households also began to decline.

Inflation Will Slow Down, But Its Regressive Effect Continues

However, the disparity in the impact of inflation on household consumption remains high, and is contrary to what was observed in previous years. In August 2019, for example, the three types of households recorded the same rate of inflation. Furthermore, consumption inflation among high-income households is higher than that observed among low-income households.

Despite the slowdown in inflation in the last months of 2022, marked differences persist in the way inflation affects the purchasing power of Mexican consumers at different income levels.

To promote the mitigation of inflation, as well as its regressive effect on the population, measures such as strengthening economic competition, respecting the autonomy of the Bank of Mexico to implement monetary policy and targeted support for those vulnerable population is important. In addition, attracting investment and new technologies are important elements to improve the supply of goods and have a greater capacity to face times of economic volatility.

Nation World News Desk
Nation World News Desk
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