VZCZCXRO3267
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5242/01 2741223
ZNR UUUUU ZZH
P 011223Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9056
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 005242 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR RICHARD MILES, DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN EAGR PINR PGOV MX
SUBJECT: CALDERON'S EFFORTS TO COOL INFLATION DRAW MIXED 
REVIEWS 
 
REF: A. MEXICO 5044 
 
     ¶B. MEXICO 391 
 
------- 
Summary 
------- 
 
¶1. (SBU) President Calderon on September 26 announced several 
measures aimed at stemming inflation, including postponing 
the enactment of a new gasoline tax and freezing prices of 
gasoline, liquid petroleum gas, and electricity until 
yearend.  Mexico's annual inflation rate has remained above 
the upper limit of the central bank's target range (4 
percent) in eight of the past 12 months due largely to rising 
international food prices -- including staple items such as 
bread, tortillas, and eggs.  Calderon cast the measures as a 
means to contain inflation, but many local observers have 
said his motivations were largely political.  Some observers 
have criticized the measures, arguing that they will not 
contain inflation expectations and that Calderon will have to 
"take the heat" for the gas tax now and again in January. 
Others have applauded the announcement, saying that it will 
help calm existing "anxiety" about inflation stemming from 
non-food related sources.  Post believes that the measures 
should not be seen as a departure from free-market policies, 
but rather as an attempt to deflect criticism about inflation 
and the gasoline tax.  End Summary. 
 
--------------------------------------------- --- 
President Announces Measures to Combat Inflation 
--------------------------------------------- --- 
 
¶2. (U) During a speech on September 26, President Calderon 
announced several measures aimed at stemming inflation and 
assisting low-income families.  First, he postponed the 
implementation of a 5.5-percent tax hike on gasoline and 
diesel, included in the recently approved fiscal reform bill, 
until January 1, 2008 (ref A).  Calderon remarked that this 
tax hike was "unfortunately" discussed at a time of high 
international prices for key products such as wheat.  (Note: 
We understand Calderon will simply not sign the fiscal reform 
bill until December so the gas tax won't come into effect 
until January 2008.  End Note.)  Second, he ordered a freeze 
on gasoline, diesel, liquid petroleum gas, and domestic 
electricity prices for the rest of the year.  He added that 
the government would redouble its efforts to provide 
marginalized groups with high-quality basic products at a low 
cost, and he announced an agreement with a retailer 
association to keep "pan de mesa" (a category of bread) 
prices from exceeding one peso per piece.  He also called on 
the media, unions, manufacturers, and other social, 
political, and economic actors not to make the situation 
worse by "serving their own interests."  He acknowledged that 
the announced measures would impose a burden on government 
finances. 
 
---------------------------------- 
High Food Prices Lead to Inflation 
---------------------------------- 
 
¶3. (U) Concerns about inflation are not unwarranted. 
Mexico's annual inflation rate has remained above the upper 
limit of the central bank's target range (4 percent) in eight 
of the past 12 months, due largely to rising international 
food prices.  In the first half of September, consumer prices 
jumped 0.62 percent fueled by a leap in fruit and vegetable, 
dairy, and back-to-school expenses.  Low-income Mexicans are 
particularly sensitive to price increases in food products 
because they spend such a large part of their income on food, 
particularly staples such as bread, tortillas, and eggs -- 
products that have seen large price increases over the past 
 
MEXICO 00005242  002 OF 003 
 
 
year.  Wheat price increases (resulting from, inter alia, 
Australia's drought and significant switching from wheat to 
corn production in the U.S. due to demand for ethanol) have 
received the most attention in recent weeks in Mexico. 
 
----------------------- 
Motivation and Reaction 
----------------------- 
 
¶4. (SBU) Although Calderon cast the measures as a means to 
contain inflation and inflation expectations, many local 
observers have said his motivations were largely political. 
Calderon appears to have been reacting to political pressure 
regarding the gasoline tax and general concerns about rising 
food prices.  Opposition political parties have been vocal 
claiming that the gasoline tax would put further pressure on 
inflation and unfairly burden the poor (Comment: Many 
economists have said the tax's impact on inflation would be 
minimal since the tax will be implemented over an 18-month 
period.  End Comment.) 
 
¶5. (SBU) A senior Bank of Mexico (BOM) official and a Deputy 
Director from Banamex were critical of Calderon's decision to 
postpone the gasoline tax, qualifying it as a "political 
decision" inspired by a desire to duck criticism from popular 
sectors.  The central bank official said he was not consulted 
about the decision.  He added that from an inflation 
standpoint, the move was counterproductive, as speculation 
had already contributed to price increases.  Capping prices 
artificially over the next three months would only mean they 
would spike dramatically in January.  Neither official could 
understand the long-term political benefit.  Calderon may 
escape criticism now but should expect opponents of the 
gasoline tax to come out strong with criticism come January 
when it is implemented.  A Senator from the conservative 
faction of the PAN echoed these sentiments, noting that now 
Calderon will have to "take the heat" twice. 
 
¶6. (SBU) By contrast, some financial analysts and members of 
the business community have applauded the announcement, 
saying that it will help stop price speculation and calm 
existing "anxiety" about inflation stemming from non-food 
related sources.  Larry Rubin from the American Chamber of 
Commerce stated publicly that Calderon's decision to contain 
energy prices this year was good news that would translate 
into better financial planning by companies.  The BOM 
announced on September 28 that the measures will help anchor 
short-term inflation expectations and will bring down yearend 
headline inflation by around 9 basis points.  When asked by 
econoff if Calderon's recent moves are alienating the 
business community, a local economist responded that 
businessmen understand that "some things are just for show." 
 
-------------------------------- 
Implications for Monetary Policy 
-------------------------------- 
 
¶7. (SBU) Before Calderon's speech, concerns about inflation 
had led many market analysts to predict the BOM will lift 
interest rates between 25 and 50 basis points by year's end. 
The BOM earlier this month held its benchmark lending rate 
unchanged, but kept its hawkish bias. 
 
¶8. (SBU) According to a Bank of America economist who 
attended a meeting with Finance Secretary Carstens early this 
week, Carstens said he did not see a need for the BOM to 
raise interest rates again this year to mitigate inflation. 
The economist noted that while Carstens probably knew about 
the measures announced on 9/26, the economist was surprised. 
While some market analysts have said the measures will take 
pressure off the BOM to raise interest rates again this year, 
 
MEXICO 00005242  003 OF 003 
 
 
this economist still expects the BOM to hike rates by as much 
as 50 basis points by yearend.  That said, he emphasized the 
importance of U.S. monetary policy decisions to Mexico by 
adding that if the Federal Reserve cuts rates again this year 
as many expect, Mexico would experience an "implicit 
tightening" of its monetary policy because the spread between 
U.S. and Mexican interest rates would be wider. 
 
¶9. (SBU) The economist remarked that the BOM's ability to 
contain inflation is limited because its "tools" are not 
designed to deal with supply-side shocks.  Several local 
observers have commented publicly that the most effective way 
to tackle inflation would be to level the playing field for 
competition in areas where the major Mexican and foreign 
companies are dominant, including telephones, broadcasting, 
energy, banking, and food processing and distribution.  The 
prevalence of monopolies and oligopolies in Mexico reduces 
the efficiency and productivity of many sectors and keeps 
prices high. 
 
------- 
Comment 
------- 
 
¶10. (SBU) The measures Calderon announced this week should 
not be seen as a departure from free-market policies, but 
rather as an attempt to deflect criticism about inflation and 
the gasoline tax.  The level of food prices, as well as any 
other issue that negatively affects Mexico's large poor 
population, are particularly sensitive topics, and Calderon 
would no doubt be happy to avoid the kind of political heat 
caused by tortilla price hikes early this year (ref B). 
Whether Calderon's decision to suspend the gas tax enables 
him to escape longer term criticism from Mexico's left and 
the poorer segments of society remains to be seen.  He may 
well be facing the prospect for similar criticism in some 
months time, prompting a decision at that time about whether 
he is prepared to weather the political attacks or push the 
tax back again. 
 
¶11. (SBU) Interestingly, the measures directly contradict 
something a Finance Secretariat (Hacienda) official related 
to econoff last week.  This official explained how Mexico has 
an "implicit subsidy" on the cost of gas because 
international prices currently are higher than the local 
price (which is a government administered price).  He added 
that Hacienda wants to get rid of this "subsidy" since the 
government has to internalize the cost of the price 
difference and because it aims to keep gas prices stable, not 
necessarily low. 
 
 
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http://www.state.sgov.gov/p/wha/mexicocity and the North American 
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BASSETT