VZCZCXRO8858
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0063/01 0101343
ZNR UUUUU ZZH
P 101343Z JAN 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0088
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
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 000063 
 
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) 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD 
NSC FOR RICHARD MILES, DAN FISK 
EXIM FOR MICHELE WILKINS 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: INFLATION A KEY CHALLENGE FOR THE MEXICAN 
GOVERNMENT IN 2008 
 
REF: A. 07 MEXICO 5242 
 
     ¶B. 07 MEXICO 391 
     ¶C. MEXICO 13 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1. (SBU) A key challenge for the Calderon administration this 
year will be containing inflation expectations and bringing 
the overall inflation rate closer to 3%.  The annual consumer 
price inflation rate hovered around the top end of the 
government's target range throughout 2007, with end-of-month 
annual rates exceeding 4.0% four times during the year. 
Headline inflation closed 2007 at 3.76%, but core inflation 
jumped to 4.00%.  Mexico will face some new sources of 
inflation in 2008, including a new corporate tax and a gas 
tax hike, both of which went into effect this month.  The 
government is trying to keep these taxes and general concerns 
about high food prices from becoming generalized.  Calderon 
cut highway tolls, convinced retailers to sell basic food 
products at a discount in the first quarter of 2008, and cut 
industrial power rates by up to 30 percent.  While these 
measures are not the most effective tools for dealing with 
inflation, Calderon probably wants to be seen as doing 
something to ease inflationary pressures to counter any 
potential political heat that would result from a generalized 
increase in prices.  End Summary. 
 
------------------------------------ 
Headline Inflation Slows in December 
------------------------------------ 
 
¶2. (U) The National Consumer Price Index rose a slightly 
more-than-expected 0.41% in December.  This figure brought 
the annual inflation rate to 3.76%, within the Bank of 
Mexico's (BOM) inflation target of 3%, plus or minus one 
percentage point.  The yearend rate is down from 4.05% at the 
end of 2006, and is the second lowest since Mexico began 
tracking inflation in 1973.  The BOM said that higher prices 
for tourism packages, tomatoes, limes, and eggs boosted 
inflation in December, while prices for local telephone 
service and a number of fruits and vegetables dropped.  The 
overall inflation rate slowed, but core inflation jumped 
0.46% in December -- bringing the 12-month rate to 4.00%, the 
highest reading since 2002, fueled by higher costs for 
tourism services, snack bars, and air transport.  According 
to a BOM survey from December, market expectations for 2008 
overall and core inflation are 3.86% and 3.67%, respectively. 
 
------------------------------------------ 
Inflationary Pressures To Continue in 2008 
------------------------------------------ 
 
¶3. (SBU) In addition to high prices for some foodstuffs, 
Mexico will have to deal with new sources of inflation in 
¶2008.  Specifically, the 5.5% gasoline and fuel tax increase 
that was approved as part of the 2007 fiscal reform went into 
effect on January 5.  While its effect on inflation should be 
limited because the tax hike will be implemented over an 
18-month period, some observers have argued that it will be 
used as an excuse to increase public transportation rates and 
have noted that, in the past, producers and retailers have 
used higher gasoline prices to justify other price hikes. 
The Single Rate Corporate Tax (IETU) also went into effect 
this month, and economists are unsure how the new tax will 
affect firms' pricing strategies.  Moreover, some tortilla 
producers are threatening to hike prices nationwide.  Local 
press reports say tortillas prices increased to 11.50 
pesos/kg in some states, from a previous 8 pesos.  While some 
 
MEXICO 00000063  002 OF 003 
 
 
observers argue that the price increases probably will be 
short lived, these reports are worth monitoring since 
tortillas are a staple in the Mexican diet and an important 
component of the CPI.  Moreover, last January the government 
faced harsh criticism when tortilla prices spiked (Ref B). 
 
--------------------------------------------- ----- 
Government Trying To Anchor Inflation Expectations 
--------------------------------------------- ----- 
 
¶4. (U) In a speech from his residence on January 7, President 
Calderon pledged that his government would watch closely the 
behavior of prices and that it would act firmly to avoid 
unjustified price hikes that could affect households. 
Calderon added that despite high prices for various 
commodities, Mexico posted one of the lowest inflation rates 
in the country's history last year. 
 
¶5. (SBU) The Calderon administration has announced a number 
of measures aimed at containing inflation expectations, given 
that such expectations greatly influence actual inflation. 
Calderon on January 7 issued a decree that permanently 
reduced peak electricity tariffs for industrial use by up to 
30 percent.  (Note: the electricity sector in Mexico is state 
run.  End Note.)  The power-rate-adjustment will cost 7.8 
billion pesos ($716 million), an expense that was planned for 
in the 2008 federal budget.  He also announced that the 
government will not adjust federally administered toll road 
fees for inflation in 2008, and that it will discount fees on 
several other toll roads through yearend.  The administration 
also convinced retailers to sell a number of household goods 
that weigh heavily in the consumption basket of low-income 
households at a discount in the first quarter of 2008. 
 
¶6. (SBU) In addition to the above measures, in late December 
the GOM announced the country's new negotiated minimum wage 
for 2008 with an eye toward fighting inflation.  The new 
daily minimum wage, which took effect on January 1, 2008, 
increased 4% over 2007 from 48.67 pesos to 52.59 pesos.  The 
4% increase was considerably less than the 10% raise sought 
by Mexico's organized labor unions.  However, since the 
minimum wage is used throughout Mexico as a standard of 
reference for such things as job salary offers, private 
service fees, government fines, tax tables, and a broad range 
of other financial indicators, the GOM ultimately sided with 
the private sector in wage negotiations on the need for a 
small increase as a way to hold down inflation (Ref C). 
 
------- 
Comment 
------- 
 
¶7. (SBU) The Calderon government undoubtedly wants to avoid a 
repeat of last January, when it took political heat from 
ballooning tortilla prices.  While the measures he has 
announced to date are not the most effective tools for 
dealing with inflation, Calderon probably wants to be seen as 
doing something to ease inflationary pressures -- especially 
since the negative effects of inflation tend to 
disproportionately hit poorer households.  While anything 
that worsens the situation of Mexico's large poor population 
(roughly 40%) is bad unto itself, this also would give the 
left fodder to criticize Calderon.  Another important reason 
for keeping inflation low is that the central bank would be 
under pressure to hike interest rates if inflation rises -- 
something that would work against the Mexican economy's 
ability to continue growing in the face of an economic 
slowdown in the U.S. 
 
 
 
MEXICO 00000063  003 OF 003 
 
 
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http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA