Inflation, South of the Border Style

by: Tim Iacono

Two stories in the LA Times over the weekend demonstrate that "inflation", however you define it, is anything but contained in the Western Hemisphere.

In Mexico, rising prices for staples such as tortillas, eggs, sugar, and milk are causing a bit of trouble for newly elected president Felipe Calderon. According to this report it's a lot easier to fight a war on drugs (by burning marijuana fields) than to battle rising prices.

Mexico's central bank announced Thursday that the consumer price index continued to rise at higher-than-hoped-for levels in January, equal to about a 4% annual rate of inflation and surpassing the government's 3% target for this year.

Prices have cooled slightly since December, the central bank said. But experts worry that supermarket price shocks could trigger a race among other merchants to boost prices.

If retailers and consumers expect prices to go up, Bernal-Leon said, they will. "Expectations are contagious, and the longer we hear about this issue, the more people are willing to increase prices," he said.

There's that inflation "expectations" fear again. That is, if producers and consumers "expect" prices to rise then it becomes self-fulfilling. Customers step up their purchases and retailers feel emboldened to mark up their product due to rising costs of production and increased demand.

The ethanol craze in the U.S. is having all sorts of impacts outside the U.S. energy markets - even if the impact isn't real. Who would've thought that U.S. corn prices would rise 80 percent in 2006? While most consumers might care less about nickel rising this much, maize is a different matter.

The two Mexican firms that control the country's wholesale corn market say price increases followed increased global demand by ethanol fuel producers in the United States.

Few are buying that explanation because tortillas and ethanol use two different kinds of corn.
Mexican farmers last year had a bumper crop of the white corn used in tortillas, spurring a government investigation of allegations of price fixing. A year ago, a pound of tortillas sold for less than 25 cents; it's now about 38 cents and up.

"Calderon said he's going to stabilize prices, but when?" asked Alma Rosa Juarez, a 45-year-old secretary. "I sure don't see it. I eat lunch at a fast-food place that used to cost me 20 pesos, and now it costs me 32 pesos. That's money I used to pay for movies. I don't go now."

Roberto Sanchez, 37, drives a taxi to support his wife and two children, ages 1 and 5. The couple were thinking of having a third child. Not anymore.

"Everything is going up, but the price of milk has affected us the most," he said. "Powdered milk used to cost me 132 pesos, and it's gone up 10 pesos. I only make 150 pesos a day. As soon as my kids get a little older, I'm going to have to put my wife to work."

The anecdotal accounts of rising prices always seem to come in much higher than the government's measure, which usually registers just a few percent.

Unless you live in Venezuela.

In Venezuela, there appears to be a very different pricing dynamic at work, reminiscent of the Soviet Union a couple decades ago - low prices, but empty shelves.

According to this report from the kingdom of Hugo Chavez, the government-run food retailer is facing tough competition from the black market.

Among the most ambitious and popular programs has been the establishment of the Mercal retail chain. Since early 2003, the network of about 14,000 retail outlets mainly in poor barrios, has sold basic foodstuffs and household goods at discounts of 35% off standard supermarket prices.

Chavez has imposed price controls on a variety of goods, such as 29 basic food items produced in Venezuela including beans, cooking oil, meat and chicken.
But mismanagement, rampant corruption and scarcities have cut into Mercal's operations. At the same time, low prices set by the government have caused manufacturers and other suppliers either to cut production or divert output to an enormous black market.
At the same time, the flood of cash washing over Venezuela from oil sales has caused demand for all goods — watches and whiskey, detergent and SUVs — to climb, adding inflationary pressure. In the last week, Venezuela's central bank released figures showing that inflation rose in January to an annual rate of more than 25%, twice the national target.

Wow! Official government statistics pegging inflation at 25 percent. They obviously need to do a few adjustments or substitutions in their consumer price index.

Surely there is someone to blame other than the government.

"It's the fault of the street vendors," she said, referring to the informal merchants who sell the black-market goods. "They're always ahead of the game."

The government is trying to retain its grip by taking measures that at times seem highly improvisational. Justifying the seizure of the sugar Thursday, officials declared it was illegal for sugar to remain in storage for more than three days.
In the Quinta Crespo market and in the informal stalls that surround it, sugar and tuna were being sold under the table for three times the government-mandated prices, eggs and meat for twice the prescribed prices.

"The government wants all the power, but they can't control how we think. This is a free country," said a street vendor who was selling black beans at twice the regulated price of 45 cents a half-kilo.

Time will tell whether ruling with dictatorial power will be able to overcome market forces - history favors the market.

At least gasoline only costs 25 cents a gallon.