Background on Jonathan Heath and His Role
Jonathan Heath, the sub-governor of Banco de Mexico (Banxico), has been acknowledged for his candid admission regarding the challenges in controlling inflation. His insights shed light on the underlying factors contributing to the persistent inflation resistance.
Key Challenges Facing Banxico
Security, Transportation, and Competition Issues:
- Heath highlighted that security concerns, transportation problems, and limited competition in various sectors are hindering Banxico’s efforts to maintain inflation within the target range.
- He emphasized that some businesses hold significant market power, exacerbating these issues and making it difficult for the central bank to achieve its goals.
Inflation Above Target Range:
Heath expressed his concern about inflation exceeding the desired range, reaching 4.22% in early May. He identified two primary factors contributing to this issue:
- Non-subyacent Inflation Increase: The rise in non-subyacent inflation, characterized by volatility, is not responsive to monetary policy measures.
- Stagnant Service Prices: The subdued tendency of service prices to decrease has been a persistent challenge.
Subyacent Inflation Resistance
Heath noted that subyacent inflation had been systematically declining since its peak in September 2022 (8.71%). However, the service prices’ trajectory showed a downward trend, reaching a high of 5.71% in March 2023 before taking 17 months to drop below a 5% annual variation in October 2024.
He observed that service prices have failed to counterbalance the pressure from goods’ inflation, which has experienced a rebound in both food and non-food items.
He explained that services are highly sensitive to the cyclical position of the economy and have yet to respond adequately.
Key Questions and Answers
- Q: What challenges is Banxico facing in controlling inflation? A: Security concerns, transportation problems, and limited competition in various sectors are hindering Banxico’s efforts to maintain inflation within the target range.
- Q: Why is inflation above the target range a concern for Banxico? A: Inflation exceeding the desired range, such as 4.22% in early May, is a concern because it indicates that non-subyacent inflation is increasing and service prices are not decreasing as expected.
- Q: How has subyacent inflation performed since its peak in 2022? A: Subyacent inflation has been systematically declining since September 2022’s peak of 8.71%. However, service prices have shown a stagnant tendency to decrease.
- Q: Why are service prices not effectively counterbalancing goods’ inflation? A: Service prices have failed to offset the pressure from goods’ inflation, which has experienced a rebound in both food and non-food items.
- Q: Why are service prices sensitive to the economy’s cyclical position? A: Services are highly sensitive to the cyclical position of the economy and have yet to respond adequately.
